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At the beginning of 2012 the demand for industrial products sharply dropped which was usual for the period of national vacations. However, this time the January plunge of sales was a continuation of negative trends in demand dynamics that formed in September 2011 when Section The Real Sector of the Economy sales stopped growing and started to fall with increasing intensity. In January 2012 these accelerating rates of decline were as high as in no other January since the 1998 default (certainly, except for the crisis January of 2009). Adjustment for seasonality smoothed out this result but only to the level of the worst growth rate since September 2009. Meantime, an apparent lowering of sales is going on since October 2011.

In 2011 a new configuration of constraints to production growth started forming in industry that reflected the specifics of sluggish recovery from the 2008 crisis (see Fig.19). First, in the first three quarters of 2011 the constraining effect of short demand increased by 8 points after the crisis minimum of late 2010. Enterprises clearly expected a more dynamic revival of demand. Second, the negative impact of working capital shortage reduced (as judged from the average annual data) down to the historical minimum. In 2011 it was mentioned by only 30% of enterprises while the best indicator for inter-crises period equaled 34% (in 2007). So, as its customary to say nowadays, industry has surpassed the pre-crisis level by this indicator.

Third, staff constraints to industrial growth continue to aggravate. In 2011 the share of enterprises where shortage of employees constrained production equaled 28% as compared with 25% in 2010, notwithstanding slow and unstable growth of both demand and output. Fourth, in the first three quarters of 2011 the constraining effect of competition with import decreased and stabilized after a steady growth in 2009-2010. Its all the more noteworthy given a sizable increase of imports according to the official statistical data and an apparent stagnation of demand for domestic products. This combination of factors leads to the conclusion that in early 2011 imported items were not considered by enterprises as competing. And one more conclusion: domestic statistics are sometimes not as bad as their interpretation. Fifth, the negative impact of non-payments, so much feared of at the beginning of the crisis, has stabilized although not at such a low level that was registered in 2007 early 2008. Sixth, in the III quarter of 2011 the mentioning of shortage of credits (as a hindrance to output growth) fell down to a concern-triggering level of 2%. The effective supply (and terms) of credits is such that industry does not need its further expansion for increasing output.

SHORTAGE OF WORKING LOW % CAPITAL INFORMATION DEMAND STAFF COMPETING NON-PAYMENTS EQUIPMENT IMPORT 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/Fig. 19. Constraints to production growth in 2003 RUSSIAN ECONOMY IN trends and outlooks At the end of the year the structure of constraints to industrial growth changed due to the growing uncertainty in the world economy and the temporary devaluation of ruble. As before, enterprises regard low demand as a key hindrance to production growth. This factor has been ranking first in the quarterly rating of constraints since the start of the crisis (which is quite explainable). However, in the IV quarter the frequency of its mentioning reduced to 47% as compared with 52% in the III quarter of 2011 and almost reached a post-crisis minimum (45%) registered a year before. The shortage of working capital that ranked second during all the phases of the current crisis was also mentioned less frequently. Moreover, in the IV quarter its constraining effect on the growth of output fell down to a historical minimum (!) over the whole period of monitoring since 1993. The third crisis factor which is hallmark for Russia non-payments by consumers now ranks only 8th with a stable share of 17%.

But the IV quarter of 2011 was marked by an apparent increase of constraining effects of two factors: the uncertainty of current economic situation and its further development and the competing import. Within a quarter the mentioning of the former grew from 22% to 38% and as a result brought it to the second place in the rating. Such a surge seems absolutely normal taking into account the persisting uncertainty about the outcome of European debt crisis, other problems on the world markets and poor understandability of Russian state statistics, the monthly interpretation of which looks like guessing from the childish rhyme maybe snow, maybe hail, maybe sour grapes.

At the end of 2011 after notable swings of the ruble exchange rate, competing import was considered to be a hindrance to production growth at 27% of Russian industrial enterprises while in the first three quarters of the year it was mentioned by 21-23% of producers. Moreover, the indicator of the last quarter became a post-crisis maximum and closely approached the pre-crisis (and absolute!) maximum of 31% registered in July 2008. It seems that the uncertainty about the ability and/or wish of authorities to safeguard ruble from devaluation makes consumers to more actively spend their savings on the purchase of imported products at not yet inflated prices to the detriment of domestic commodities.

At the beginning of 2012 the new configuration of constraints to output growth continued forming in the Russian industry. Factors that earlier one could hardly suspect of great influence on enterprises are becoming leaders, while traditional sores of our industry are losing their negative impact on its performance However, insufficient demand remains a definite and logical leader of the current crisis.

Its mentioned by 51% of enterprises which is 16 points less than at the peak of the crisis but is still the maximum level over the recent 6 quarters.

The factor of uncertainty of the current economic situation and its further development climbed to the second place in autumn 2011 (as the crisis of Eurozone started to aggravate) and seriously reinforced its positions at the beginning of 2012. Its mentioning grew up to 41% although back in summer 2011 only 24% of enterprises complained of it.

The negative impact of competing import on the domestic industry attained its historical (1995-2012!) maximum and now ranks third. At the beginning of 2012 one third of surveyed enterprises suffered from the pressure of import that ousts Russian products from the markets.

The pre-crisis maximum of this indicator registered in July 2008 was 31%. Before the default only 16% of enterprises complained about import. At present its pressure is most detrimental for enterprises in machine-building (41%), ferrous metallurgy (35%) and consumer goods industry (34%).

Section The Real Sector of the Economy The negative effect of shortage of working capital fell down to 27% which is a historical minimum (!) of mentioning this constraint. At the peak of the current crisis 50% of enterprises were affected by this factor, while the absolute maximum was registered in 1995 and reached 83%. The picture is completed by an actual lack of negative effect of credit shortage on the output dynamics in Russian industry. For the fourth quarter in turn only 2-3% of enterprises complain about it.

4.2.3. Price policies of enterprises In January 2011 factory prices demonstrated the highest growth rates over the past 15 years (!), i.e. they had not grown so rapidly since the end of 1995. Within a month their growth rates (i.e. balance in case of surveys) increased from +18 to +50 points. While in December 2010 78% of enterprises (in 2010 77% on the average) reported constancy of their prices, in January 2011 the share of such responses fell down to 46%. Certainly, a month before enterprises planned a sizable increase of prices at the beginning of 2011 but not to such an extent! Plans of enterprises showed their intentions to preserve the high rates of price growth in the coming months. Its projected intensity was somewhat lower but not low enough to stop a powerful inflationary wave that formed in the Russian economy at the end of 2010.

In February the growth of factory prices slowed down by 12 points after the January surge.

However, its intensity did not return to the pre-New Year levels: the actual balance of price growth was as high as 35 points while in the IV quarter of 2010 17 points. So, enterprises had to raise their prices twice faster than at the end of the previous year. The most intensive growth was registered in ferrous metallurgy, chemical and petrochemical industries. In February factory prices stopped growing only in food industry. Enterprises projections suggested possible maintaining of February growth rates in March-April. The balance of expected change of this indicator equaled 37 points and remained at the level of January projections.

In February 2011 unit costs at industrial enterprises demonstrated the most intensive growth since the onset of the crisis which was quite exactly forecasted back in November 2010. The biggest increase took place in ferrous metallurgy (balance +73 p.p.), timber processing, consumer goods industry and machine-building (+64 p.p. in each), chemical and petrochemical industries (+61 p.p.).

However, in March the inflationary wave that formed in the Russian economy at the end of 2010 the beginning of 2011 started to fade out. The actual rates of price growth halved as compared with the January surge down from 47 to 23 balance points. Its worth noting that in the IV quarter of 2010 surveys registered growth of factory prices at the rate of 17 b.p., in the III quarter 7 b.p. In March the actual growth of prices decelerated in all branches except for chemical industry and construction materials industry. For the second month in turn it was the slowest in food industry. Price projections experienced similar adjustments. After the December surge they lost 14 points and approached the level of November 2010.

In April inflation continued to decelerate (see Fig. 20). As compared with January the rate of price growth fell by 28 points and returned to the level of the IV quarter of 2010. Similar changes occurred in price projections: as compared with the peak of December 2010 they lost 27 points.

RUSSIAN ECONOMY IN trends and outlooks % 01/PROJECTED 12/ACTUAL -12/-1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/Fig. 20. Change of factory prices (balance = % growth - % decrease) In May the growth of factory prices slowed down once again but only by 4 points. As a result within the 4 preceding months its intensity decreased 3.5 fold (as judged from balance).

However, further lowering of this indicator was already questionable. In May enterprises projections indicated the reversal of their price policies. While from January to April price projections steadily declined, in May this trend discontinued, and for the first time in Russian producers declared their intention to accelerate growth of prices or at least stop its deceleration.

Indeed, in June the slowing down of price growth recorded by surveys since February seemed to halt. The balance stopped falling which indicated the preservation of May growth rates. Its possible that the increase of sales enabled enterprises to modify their price policies and halt the decline of price change balance (rate) that lost 36 points within the previous 4 months. Price projections of enterprises reflected this intention in May and proved it in June. Within these 2 months the balance between upward and downward price projections remained actually unchanged and was somewhat above the indications of April that were the lowest since October 2010. Its noteworthy that it was last October when an inflationary wave formed in Russian industry, generated by drought and the forthcoming raising of unified social tax (UST). In December 2010 (as judged from expectations) and in January 2011 (as judged from the actual growth) it reached its peak.

In July the growth rates of prices for industrial products remained the same as in June.

Price projections of enterprises didnt change either and reflected the intention of producers to halt the slowdown of factory price growth that was observed in the first months of the year.

Principal changes took place in the growth rates of unit costs in Russian industry (see Fig. 21). According to estimates of enterprises, in the III quarter of 2011 unit costs of industrial products grew at minimal rates over the whole period of monitoring this indicator since 1997 (!). Even before the 1998 default the intensity of their growth was 3 times above the current level. Unit cost projections for the III quarter suggested the slowing down of their growth, but not as critical as was actually observed. Probably, it was this factor that primarily conditioned the preservation of high (as compared with demand) growth rates of output and replenishment of finished goods stocks that enterprises planned to sell in autumn and winter when prices and costs returned to their usual growth patterns.

Section The Real Sector of the Economy % ACTUAL PROJECTED -1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/Fig. 21. Change of unit costs (balance = % growth - % decrease) Long-term stagnation of demand and attempts to sustain output growth made enterprises return to the application of price levers. In August the growth rates of prices once again declined and in September producers refrained from raising prices for the first time since January 2010. Russian industry rarely resorted to this tool: the halting of factory prices growth and their further lowering was registered by surveys on the eve of the 1998 default, on the eve of the 2008 crisis and on the exit from the 2008 crisis.

Price projections of enterprises also continued falling but not as rapidly as in the first half of the year when industry restored status quo after the traditional New Year surge of tariffs that this time was reinforced by the increase of social insurance rates. Within the III quarter price projections of enterprises lost 11 points, in September only 2 points.

Negative dynamics of sales forced industrial enterprises to more actively use price policies with a view to revive demand. While in September factory prices stopped growing, in October they started to decline absolutely. Last time industry resorted to this tool in December 2009.

But then the actual lowering of prices was accompanied by projections of their traditional growth at the beginning of next year. In October 2011 the situation was principally different.

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