BASIC DEVELOPMENTS AND TRENDS 2 INFLATION AND MONETARY POLICY (P.Trunin) 4 FINANCIAL MARKETS (N.Burkova, E.Khudko) 8 REAL ECONOMY SECTOR: TRENDS AND FACTORS (O.Izryadnova) 18 FOREIGN TRADE (N.Volovik. K.Rezenkova) 21 THE STATE BUDGET (E.Fomina) 25 MORTGAGES IN THE RUSSIAN FEDERATION (G.Zadonsky) 37 CREDITING OF PEASANT (INDIVIDUAL PRIVATE) FARMS ON LAND MORTGAGE (N.Shagayda) 41 THE RUSSIAN DEFENSE SECTOR: RADICAL REFORMS ARE URGENTLY NEEDED (V.Zatsepin) 44 WORLD TRADE WITH GOODS AND SERVICES IN 2009 AND PROSPECTS OF RUSSIAN FOREIGN 47 TRADE DEVELOPMENT (A.Pakhomov) REVIEW OF ECONOMIC LEGISLATION (I.Tolmacheva) 54 REVIEW OF RF GOVERNMENT MEETINGS IN APRIL 2010 (M.Goldin) 56 REVIEW OF LEGISLATIVE DOCUMENTS CONCERNING TAXATION OVER MARCH–APRIL 2010 59 (L.Anisimova) CHANGES IN REGULATORY BASIS FOR BUDGET PROCESS (M.Goldin) 62 RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES RUSSIAN ECONOMY IN APRIL 2010:
TENTATIVE INDICATORS AND MAJOR TRENDS The most important developments of the political background in April were linked to the relations between Russia and its neighbors. The fall of Kurmanbek Bakiyev regime in Kyrgyzstan has once again demonstrated the weakness of some post-Soviet regimes; the Russian officials actually welcomed the overthrow of Bakiyev and demonstrated a willingness to provide political and financial support for the new government.
A meeting of Vladimir Putin, the Russian Prime Minister with Donald Tusk, the Polish Prime Minister at the Katyn Memorial on April 7 has demonstrated a significant softening of Moscow in its relations with Poland and the desire to mitigate the accumulated tension in their relationship and find common basis for cooperation in the energy sector (apparently, these changes prove the recognition the scale of the possible changes in the gas market by the Russian leadership).
Finally, another attempt to “reboot” were the agreements concluded between the Prime Minister Vladimir Putin and the new Ukrainian government on the reduction of gas prices in exchange for the agreement on the extension of the Russian fleet disposition in Sevastopol. Despite the fact that the agreement will result in a significant loss to the revenue of the Russian budget (actual price reduction will be achieved at the expense of export tax, i.e., due to federal budget revenues, rather than revenues of Gazprom), the agreement opened the way for discussions on other projects for expansion of economic cooperation, particularly in the nuclear and aircraft industries.
The leading role in the formation of trends in the macroeconomic sphere are, as always, the events in foreign markets. In April 2010, oil prices reached a new level and were consistently exceeding $ per barrel, and for the last three weeks in April remained at the level of $ 86 per barrel. This means, in particular, that the rate of export duty on oil will rise again. Growth in revenues from energy sources exports indicates that the federal budget deficit for 2010 will be lower than the estimated indicators foreseen in the law and probably will not exceed 6% of GDP (against the estimated 6.8% of GDP).
However, this trend remains unstable and is fully dependent on the market fluctuations in prices and demand for Russian exports, while maintaining significant risks to the budgetary system. At the same time, it is worth noting that the growth in oil prices in April has not led to the growth in stock indices as of the month results. Despite the fact that they remained in the scope of the post-crisis peaks and reached new psychological heights at the beginning of the month, their values at the end of April did not differ from the late March indicators. Such dynamics in April, however, was typical for majority of the global markets.
The trade balance in the I quarter of 2010, according to tentative estimates of the Bank of Russia has reached the values of the pre-crisis period - $ 46 billion against $ 18.8 billion in the I quarter of and $ 49.9 billion in the I quarter of 2008. The export of the I quarter 2010 amounted to 83% of the exports in the I quarter of 2008 against the imports - 75% from the level of 2008. Therefore, in general, the overall recovery of imports in annual terms is still behind from export growth rate; the import volume in the I quarter amounted to 49.6% of exports, while in the pre-crisis 2007-2008 it amounted to 62-63% of exports, and in 2001-2006 it varied in the range of 51-57%. Herewith, in the I quarter of 2010 there was again a faster growth of imports: while export in February of 2010 has grown by 9.9% as compared with January, the import has increased by 36.3% in February. The increase in imports contributed to the continued strengthening of ruble.
In the I quarter of 2010 the ruble strengthening in real terms against dollar amounted to 3,8% and 12% against Euro. Accordingly, strengthening of the effective exchange rate in real terms in the I quarter made 7.3%. As of April results, the ruble against dollar remained practically unchanged, while the Euro rate continued to fall substantially at the background of the “Greek factor” and other negative news from the Eurozone.
Foreign currency and gold reserves demonstrate growth for the second consecutive month: from 26.03.2010 to 23.04.2010 they have grown by $ 10 billion. Consumer Price Index since the beginning RUSSIAN ECONOMY IN NOVEMBER: TENTATIVE INDICATORS...
of the month made 100.3%, and in general since the beginning of the year – 3.5%; in annual terms inflation fell down to 6.1%. Low inflation rate allowed the RF Central Bank to lower the refinancing rate again by 0.25 percentage points to 8%. As before, the possibility of reducing the rate of the Bank of Russia motivates by low inflation, and crediting the real sector was announced as the incentives for the rate reduction.
However, the previous steps in this direction have not led to the desired result: the banks are still very cautious in lending to the real sector due to the sustained risks and uncertainty in the prospects of the economy. As a result, banks are accumulating funds on deposits with the RF Central Bank in the form of the Bank of Russia bonds. In addition, recently the inflation has slowed down faster than the declining rates of the RF Central Bank, i.e., in real terms the rates were growing. Due to significant liquidity reserves of the banks, the rates on the interbanking credit market fell down below 4%. The rapid growth of monetary supply at the background of a significant budget deficit and a tentative renewal of capital inflow are likely to lead to a higher inflation rate in the second half of the year.
The Bank of Russia is trying to take under control the ruble exchange rate, preventing its strong fluctuations: buyes/sells about 700 million dollars in the currency market at each level of resistance in the two-currency basket, and then shifts this level by 5 kopecks. As a result, at the background of a favorable external economic environment, the speculators are able to earn on the tendency of ruble strengthening and on the difference in interest rates. In our view, such a mechanism of exchange rate policy does not contribute to the independence of the RF Central Bank monetary policy and to the transition to inflation targeting.
The dynamics in the real sector does not allow, as before, to speak of a steady trend in economic recovery. In the domestic market, the most significant impact on the economic situation was provided by the continued decline in investment activity. In the I quarter of 2010 investments in the fixed assets decreased by 4.7%, the scope of work in construction - by 8.1%. The factors that determined the low level of investment activity was the continued slowdown in housing construction, as well as the focus of enterprises on the least budget-consuming opportunities, in particular, more intensive utilization of production capacities. Savings on capital expenditures was accompanied by a slight increase in the demand for labor in the I quarter of 2009. As a result of a decreased significance of labor and capital factors, supported by the low dynamics of real wages growth, the economic situation was be governed by the action of inertial tendencies of 2009. Against the background of declining interest rates, growth in export revenue in the economy, the growth of liquidity in the banking sector and reduction of capital outflow in absolute terms, the low investment activity reflects a lack of business strategic plans for recovery from the crisis.
In the consumer market, with an increasing turnover of retail trade by 1,3%, there took place a reduction in the market of commercial services made 0.9% against the I quarter of 2009. At the background of decelerated inflation in the I quarter of 2010 to 3.2% against 5.4% in the I quarter of 2009, including foodstuffs up to 3.8% against 5.0% for non-food products to 0.9% versus 3.8% and commercial services to 5.4% against 8.5% a year earlier and with the growth of real income by 7.4%, the situation in the consumer market reflects low consumer expectations of the population.
Comparison of the dynamics of trade turnover as broken down by commodity groups and structure of the population expenses points to the lower expenses for current needs due to reduced purchases of non-food goods and services consumption. In the I quarter of 2010 index of retail trade turnover of food product group made 103.9% and non-food items - 98.9% against the relevant period of preceding year. The share of expenditures for the purchase of goods in the monetary income of the population has decreased in comparison with the previous year by 3.5 percentage points. The Specifics of consumer behavior in early 2010 was the sustained trend of savings accumulation and restrained behavior in the credit market. In this regard, it should be noted firstly, that real wages for the I quarter of 2010 have grown by 2,2% (while namely the wages of hired workers form the dominant part of the population income) and secondly, the sustained tension in the labor market.
Index of industrial production in the I quarter of 2010 as compared with the I quarter of amounted to 105.8% and 89.9% versus the IV quarter of 2009. In February and March of the current year, the rates of industrial production as compared with the same period of the last year reached the positive values and were respectively 104.8% and 115.3%. It is worth noting, that the output growth was observed in all aggregated economic activities.
RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES INFLATION AND MONETARY POLICY P.Trunin In March 2010, the RF Consumer Price Index (CPI) continued its downward trend. It amounted to 0.6 % in comparison to the corresponding period of 2009 and to 1.3 % in February 2010. In April, the drop in inflation continued: according to our estimates, the April CPI was 0.4 – 0.%. However, a rapid increase in money supply that is taking place against the backdrop of a considerable budget deficit, growth in prices for energy carriers and a possible resumption of capital inflows will, most likely, result in an acceleration of inflation in the second half of the year. Given the existing situation, any further softening of Russia’s monetary policy cannot be considered to be totally justified. At the same time, the RF Central Bank’s attempts to control the exchange rate of the ruble may lead to a large-scale inflow of capital and a rise in inflation, and so deprive the Bank of Russia of any effective instruments of monetary policy.
In March, the Consumer Price Index was 0.6 % (see Figure 1). Thus, Russian inflation continued to decelerate: in March 2009 the CPI amounted to 1.3 %, while in March 2008 – to 1.2 %. The twelve-month CPI (April 2009 – March 2010) dropped to 6.5 % from the level of 7.2 % that was recorded by the end of February 2010. The largest contributor to the price rise in March was the increase in prices for food commodities (+ 1 %). The highest rise was noted in the prices of eggs (+ 10.1 %), fruit and vegetable products (+ 4.2 %), butter (+ 1.2 %) and alcoholic beverages (+ 1.1 %).
At the same time, there was a drop in the prices of granulated sugar (–1.7 %), meat and poultry (-0.2 %), and macaroni products (–0.2 %).
March saw the continuation in the rise of prices for commercial services to the population (0.4 % by the end of the month). The highest rise was registered by passenger transport services (+ 1.3 %), medical services (+1.1 %), spa and health resort services (+ 0.8 %), and domestic services (+0.6 %). By contrast, there was a decrease in the prices of overseas travel services (– 07 %), pre-school education services (–0.3 %), and some types of housing and utilities services.
In March, there was a rise in the prices of nonfood commodities, which went up an average of 0.4 %. The fastest growth was registered by the prices of tobacco products (+1.7 %), clothes and underwear (+0.7 %), textile products (+0.6 %) and motor gasoline (+0.6 %). Prices for television and radio equipment went down an average 0.3 %, and those for pharmaceuticals – an average 0.5 %.
It should be noted that the high rates of the fall in inflation can be largely explained by the base effect, because at the beginning of 2009 there was a rise in inflation caused by the ruble’s weakening. However, it can be expected that this effect will soon disappear because in the second half of 2009 there was a sharp deceleration in inflation caused by stagnation of aggregate demand and money supply. At present, recuperative processes are clearly gaining momentum in the economy, and money supply is once again rapidly rising, which creates potential inflation risks for the second half of 2010.
Apparently, the decline in infl ation will continue throughout the next quarter. However, the rate of inflation will gradually increase with the resurgence of the economy and the growth in money supply caused by the Bank of Russia’s support to the ruble and by the monetization of budget deficit. At the same time, Russia’s CPI for 2010 will, most likely, be lower than in 2009.
In March 2010, the base consumer price index1 amounted to 0.6 % (vs. 1.4 % in the corresponding period of the previous year). According to our estimates, the April CPI was 0.4 – 0.5 %.
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