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In spite of the fact that the beginning of this year was characterized by a gradual increase in the monthly rates of growth across manufacturing industries, on the whole in the 1st quarter of 2006 the increase in the production of manufacturing industries made 2.8 per cent as compared with 4.1 per cent observed in the respective period of the preceding year. In comparison with the figures registered in the respective period of the preceding year, there was observed growing differentiation of the rates of production across individual types of activities.

In the 1st quarter of this year, the production of consumer goods was characterized by a growth in output of food products (103.3 per cent). A specific feature of the 1st quarter of 2006 was the overcoming of the decline observed in textile and clothing production (109.6 per cent) and production of leather and footwear (111.8 per cent).

In the situation characterized by falling rates of growth in investment demand, the standing of mechanical engineering in the structure of the Russian economy seemed to be rather favorable in the near term outlook. In the course of analysis of the trends of development of mechanical engineering, it should be noted that imports of machinery and equipment increased at the rates outpacing the dynamics of domestic mechanical engineering and decline in the investment demand for specialized equipment on the part of the fuel and energy industries, as well as metallurgy and manufacturers of machinery and equipment. In the 1st quarter of 2006, in the production of machinery and equipment there was registered a decline in output by 12.6 per cent in comparison with the figures registered in the respective period of the preceding year.

In the 1st quarter of 2006, the production of transport vehicles and equipment grew by 3.2 per cent as compared with 4.1 per cent registered in the respective period of the preceding year. The output of cars grew by 3.1 per cent as compared with a 5.5 decline observed in the 1st quarter of 2005. Due to the low competitive power of the domestic motor vehicles, there was registered a growth in demand for foreign products both imported and manufactured in the Russian territory.

In the beginning of this year, the positive dynamics of output was restored in the pulp and paper industry (103.9 per cent) and production of plastic and rubber articles (118.1 per cent).

--2004 2005 -Figure. Changes in the rates of production of manufacturing industries as broken down by the types of economic activities in 2004 through 2006, in per cent of the figures registered in the respective quarter of the preceding year.

In January through March of 2006, inflation rates made 5 per cent. After the acceleration of inflation observed in January through February of 2005 to 4.1 per cent, in March of 2006 its rate declined and made 0.8 per cent. The major contribution in inflation was made by an increase in the prices of food products. In the 1st quarter of 2006, prices of food products grew by 6.2 per cent as compared with 4.9 per cent registered in the respective period of the preceding year. On the market of non-food products, in January through March of 2006 prices increased by 1.3 per cent, what was almost 4 times below the general inflation rates. In contradistinction to the markets of food products, in this sector there were observed much more intensive dynamics of supply and stronger competition.

The market of paid services was formed at the backdrop of intensification of dynamics of prices and tariffs by 8.0 per cent. Among the monitored types of services, prices and tariffs in housing and public utilities (115.6 per cent) and transport (105.8 per cent) grew most dynamically. The increase in administrative tariffs produced a less significant impact on inflation than in 2005 as a result of the measures aimed at the limitation of growth in the housing and public utilities tariffs. However, housing and public utilities services were leaders in the structure of paid services rendered to households and made more than of the total amount of paid services. It was one of the factors behind the increase in the expenditures related to the payments for services in the structure of cash household incomes.

In the 1st quarter of 2006, prices set by the producers of manufactured goods increased by 6 per cent. At the same time, the increase in oil prices (13.6 per cent) and oil products (15.5 per cent) made the most significant contribution in inflation in industry and in production of electrical power, steam, and hot water (9.8 per cent). As concerned manufacturing industries, on the average the growth in prices made 3.5 per cent, whereas in extractive industries this indicator was registered to be at 10.8 per cent.

Woodworking and wooden articles Metallurgical products Production of machinery and equipment Manufacturing production metallurgical mineral products Production of transport vehicles and equipment Production of leather, leather products, and footwear Food products Production of oil products Chemical products Pulp and paper production Textiles and clothing Production of rubber articles and plastics Products of non Production of electrical, electronic and optical equipment In January of 2006, there were raised average wholesale prices of natural gas regulated at the federal level for all categories of consumers by 11.9 per cent, at the same time tariffs on freight transported by railroads grew by 9.2 per cent. In accordance with the data published by Rosstat, the average national tariffs on electrical power sold to different categories of consumers in creased by 9.8 per cent in January through March of 2006, whereas the caps set on the increase in tariffs in 2006 were at 7.per cent.

O. I. Izryadnova Oil and natural gas sector In 2006, the world oil prices remain high that ensures high level of export revenues to the state budget and Stabilization fund. In parallel with this, the tax burden on the sector increased and its export orientation became stronger. The world oil market situations allows to expect remaining of high world oil prices in the near future and favorable external environment for the formation of revenue part of the state budget, replenishment of the Stabilization fund and development of the oil and natural gas sector.

In the first months of 2006, the world oil prices remained at an extremely high level, that exceeds US $ 55-60 per barrel. Basically, such a situation can be explained by high growth rates of the world economy, more specifically, the economies of the U.S. and China and the low level of idle production capacities for oil extraction. OPEC actually refused to maintain the world oil prices within the target price range US $ 22-28 per barrel, earlier set by this organization, and pursued a soft-pedal policy with regard to increase of oil extraction. At the last OPEC conferences (held in January and March of 2006) decisions were taken to hold unchanged by OPEC countries (excluding Iraq) the oil production quotas at a level of 28.0 million barrels a day. Outside OPEC, decline in the oil production growth rates in Russia has a considerable impact on the dynamics of oil production. Tension is kept in the sectors of refining and cargo transportation, which is caused by the lack of capacities available to the sectors which, in turn, lead to high cost of transportation and oil processing. Geopolitical risks determined by the situation in such countries as Nigeria, Iran and Iraq, keep high the level of uncertainty on the world oil market.

As a result, in the first quarter of 2006 the average price of Brent oil reached US $ 61.75 per barrel, while Russian Urals US $ 58.25 per barrel. The average price of the oil basket of OPEC member countries considerably exceeded the upper target price threshold set by the organization and reached in the 1st quarter of 2006 on average US $ 57.65 per barrel (Table 1). In April 2006, there was observed a further growth of world oil prices; the price of Russian Urals on the world (European) market exceeded US $ 60 per barrel.

Table World oil prices in 2002-2006, US$ per barrel.

2002 2003 2004 2005 1 Q Brent, UK 25.02 28.83 38.21 54.38 61.Urals, Russia 23.73 27.04 34.45 50.75 58.OPEC oil basket 24.34 28.13 36.05 50.64 57.Source: OECD International Energy Agency, OPEC.

In the first months of 2006, the development of oil and gas sector in the economy of Russia was characterized by persistence of the trend towards the growth in production of oil, oil products and natural gas. In parallel with this, the growth rates of oil production continued to decline. In the 1st quarter of 2006 compared with the respective period of the prior year, increment in the volume of oil production, including gas condensate, made up only 1.8%, while in 2002-2004 the increment of production was 8.9-11% per year, in 2005 2.2%. In the 1st quarter of 2006 vis--vis the respective period of the prior year, the volume of primary oil refining increased by 6.9%, the refining intensity rate made up 69.7%, which is somewhat lower than the level of previous year (70.2%). Though in a relatively slow pace, but still continued the growth of natural gas extraction, which in the 1st quarter of 2006 reached 2.3% (Table 2).

Table Oil, oil products and natural gas output in 2002-2006, as % of the figures registered in the preceding year 2002 2003 2004 2005 1 Q Oil, including gas condensate 109.0 111.0 108.9 102.2 101.Primary oil refining 103.3 102.7 102.6 106.2 106.Motor gasoline 104.9 101.2 103.8 104.8 104.Diesel fuel 104.7 102.0 102.7 108.5 106.Furnace fuel oil 107.1 100.3 97.8 105.8 108.Natural gas, cub. m. billion 101.9 103.4 101.6 100.5 102.Source: Federal Service of State Statistics.

As a result of changes occurred in 2004-2005 in the organizational structure of the oil and gas sector (separation of Yuganskneftegas from YUKOS and its mergers with Rosneft, acquisition by Gazprom the oil company Sibneft) the share of state-owned companies considerably increased on the Russian oil market. In particular, the share of Rosneft in the all-Russia oil extraction increased (at the expense of Yuganskneftegas) from 4.9% to 15.8%, while Gazprom - from 2.7% to 9.7%. Totally, the share of state-owned companies (Rosneft and Gazprom, including Sibneft) on the Russian oil market increased up to 25.5%. The share of YUKOS sharply declined (up to 5.1%). As concerns gas production, Gazprom (which share in the All-Russia gas extraction made up, according to the results of 2005, 85.4%) continues to dominate (Table 3).

Table The share of the largest oil and gas companies in the production of oil and gas* Share in the total production of Share in the total production of oil, % gas, % Russia. total 100.0 100.LUKOIL 18.8 0.TNK-BP Holding 16.0 1.Rosneft 15.8 2.Surgutneftegaz 13.6 2.Gazprom+Sibneft 9.7 85. including:

Gazprom 2.7 85. Sibneft 7.0 0.Tatneft 5.4 0.Slavneft 5.1 0.YUKOS 5.1 0.RussNeft 3.0 0.Bashneft 2.5 0.Other producers 4.9 6.State-owned companies.


Rosneft+Gazprom+ 25.5 87.+Sibneft including:

Yuganskneftegas 10.9 0.* According to the 2005 data.

Source: The RF Ministry of Industry and Energy, authors calculations.

In the first months of 2006 one could see a resumption of price rise in oil, oil products and natural gas on the domestic market. In the last months of 2005, the temporary decline in producer prices for oil products could be explained by obligations of the leading oil companies (assumed by them under the influence of the government in September of 2005) to stabilize the selling prices of motor gasoline on the domestic market. Despite the considerable growth in January-February, the producer prices for oil and light oil products remained lower than their maximum level reached in October 2005, while in February 2006, the prices for gas and fuel oil reached their maximum over the whole period of reforms (Table 4).

Table Oil, oil products and natural gas prices (in US $) in 2002-(average wholesale prices of producers, US $ / metric ton) 2002 2003 2004 2005 2005 2006 Dec. Dec. Dec. Oct. Dec. Jan. Feb.

Oil 60.7 70.1 123.5 201.0 167.2 158.0 175.Motor fuel 168.8 236.9 333.1 386.6 318.2 333.6 379.Diesel fuel 153.8 214.3 364.3 455.6 417.0 419.7 453.Furnace fuel oil 66.1 66.0 69.4 178.1 142.7 138.8 187.Gas, US $ / thous. c. m. 5.9 4.4 10.5 13.1 11.5 12.8 13.Source: calculated basing on the data presented by the Federal Service of State Statistics.

As the analysis of the data on extraction and export of oil and oil products shows, practically all oil, that is extracted extra in recent years, is exported (either directly or in the form of oil products derived from it). As a result, export orientation of the sectors was markedly enhanced. The share of net exports of oil and oil products in the production of oil reached 73.8%, the net export of oil makes up 53.2% of its production. The share of net export in the production of gas makes up 31.5% (Table 5).

Table Production to energy resource export ratio in 2002-2005.

2002 2003 2004 Oil, mil. tons Production 379.6 421.4 458.8 470.Exports 187.5 223.5 257.4 252.Net exports 181.3 213.4 253.2 250.Net exports, as % to production 47.8 50.6 55.2 53.Oil products, mil. tons Exports 75.0 78.4 82.1 97.Net exports 74.8 78.2 81.4 96.Oil and oil products, mil. tons Net oil and oil products exports 256.1 291.6 334.6 346.Net oil and oil products exports, as 67.5 69.2 72.9 73.% to oil production Natural gas, cub. m. billion Production 594.5 620.3 634.0 636.Exports 185.5 189.3 200.4 207.Net exports, as % to production 30.0 29.1 30.5 31.Source: Federal Service of State Statistics, The RF Ministry of Industry and Energy, Federal Customs Service, authors calculations.

As the analysis of dynamics of the Russian oil export over the long period of time shows, in 2005, the overall net exports of oil and oil products reached a historical maximum and exceeded the level of 1988 (characterized by the maximum volumes of oil export). With some increase of the share of oil products, the export of crude oil (that make almost three fourth of the total export of oil and oil products) still dominates in the structure of oil export. In the export of oil products, the greater part of it falls on fuel oil that is used in Europe as a raw material for its further processing, and a diesel fuel.

The main part of energy resources (85% of oil, 96% of oil products, and 77% of gas) is exported outside CIS.

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