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In 2011 65% of enterprises stated that they actually raised prices in response to higher UST. The deviation from the projected 70% is very small. Small enterprises decided to do it in only 65% of cases; the leaders in this respect (77%) were entities employing from 251 to 500 workers. As projected, consumer goods industry used the raising of prices as a protective measure against new UST most often as compared with other industries (in 85% of cases), then followed machine-building (78%) and chemical industry (71%). Meantime, in the food industry only 42% of enterprises reported the increase of prices although 64% of them planned to do it. Apparently, the autumn-winter (2010) period of higher prices for food products enabled the industry to alleviate the problem of UST. State enterprises raised prices in 80% of cases just as they had projected. The leaders by price growth were limited liability companies (89%).

The lowering of profits, i.e. the readiness of enterprises to cover the increase of compulsory insurance contributions at their own expense, ranked second among possible responses to higher UST. In 2010 59% of enterprises mentioned it. Almost all enterprises in fuel industry and ferrous metallurgy, of enterprises in timber processing and about 60% of enterprises in non-ferrous metallurgy and machine-building were ready to take such a step. On the other pole was consumer goods industry where only 30% of enterprises could afford using profits for payment of higher contributions.

The 2011 survey revealed that profits became the most commonly used source of funds for meeting public commitments. 67% of enterprises resorted to it. In food industry, timber processing and metallurgy profits were used for this purpose by 80% of enterprises. This fact seemed to have a negative effect on the estimates of financial and economic performance of enterprises in the II quarter of 2011 when it clearly deteriorated. For the first time since January 2009 the balance of estimates decreased and the decrease was quite sizable from -5 to 13 points. This was the result of higher share of poor estimates (up from 15 to 21%) and the dropping share of satisfactory estimates (down from 71 to 65%). At the stage of recovery from the crisis these indicators had never demonstrated negative dynamics before.

In 2010 29% of industrial enterprises intended to cut investments in case of higher tax burden. These projections turned out to be quite precise. In 2011 the same 29% of enterprises actually responded to tax innovations in such a way. A year before this response was most frequently mentioned as possible in non-ferrous metallurgy (49% of enterprises stated such intentions in 2010 and 39% actually halted development plans in 2011), timber processing (46% and 39%, accordingly) and consumer goods industry (40% and 34%, accordingly). In 2011 machine-building also joined the group of leaders by the decrease of investments due to higher UST: 31% of enterprises in the industry had such intentions and 36% actually materialized them.

In 2010 the reduction of employment benefits (voluntary health insurance, other social benefits to employees, soft loans) ranked third by popularity among 10 possible responses to higher UST rates. Most frequently it was mentioned by large enterprises (which is understandable as such benefits are more widely spread in this group), enterprises in non-ferrous metallurgy and construction materials industry.

Section The Real Sector of the Economy Raising of prices Reduction of profits Reduction of employment benefits Reduction of investments Dismissal of inefficient workers Reduction of wages for all workers Illegal employment, shadow schemes Reassigning of wages to skilled workers Reduction of output Halting of production 0 10 20 30 40 50 60 70 2010 Fig. 33. Projected (2010) and actual (2011) responses of enterprises to the raising of compulsory insurance contributions, as % of respondents But the actual saving at the expense of employment benefits turned out to be more modest.

In 2011 only 24% of enterprises reported using such sources of financing bigger expenditures on UST. The accuracy of enterprises projections regarding this protective measure was the lowest. As a result by the frequency of actual application it stepped backed to the fourth place. It was more often used by small enterprises than by large ones. Among industries the leaders were food industry, timber processing and non-ferrous metallurgy.

Dismissals of inefficient workers due to higher rates of UST were planned by 29% of enterprises in 2010. They could be most sizable in non-ferrous metallurgy and consumer goods industry. Actually 20% of industrial enterprises (first of all small and very large ones, engaged in machine-building and consumer goods industry) managed (opted) to take such steps.

In 2010 18% of enterprises planned to lower wages in order to reduce the amount of compulsory insurance contributions. This measure was more popular with small enterprises; the probability of its implementation reduced in line with the growth of enterprise size. In ferrous metallurgy and construction materials industry 25% of enterprises were ready to take such unpopular steps. However, in 2011 only 13% of enterprises actually cut wages. As expected, small enterprises resorted to this measure more often. Among branches only food industry stood apart with the indicator amounting to 24%.

To our mind, the low popularity of responses affecting employment and labour remuneration can be explained by big problems that Russian enterprises encounter and will continue to encounter on the labour market. On the eve of 2008 crisis the availability of skilled personnel became a serious constraint to production growth in Russian industry. Half of enterprises stated that in July 2008. At the stage of recovery from the crisis producers start to realize that labour can soon become the scarcest resource. The shortage of personnel relative to expected changes in demand has long been observed in industry. Therefore the solving of problems at the expense of workers is the last thing enterprises are going to do.

RUSSIAN ECONOMY IN trends and outlooks In 2010 only 9-10% of enterprises projected to use criminal protective measures (reassignment of wages to the most qualified workers with further redistribution in envelopes, the reduction of these payments by means of illegal employment, the general escape into the shadows). In 2011 7-8% of enterprises implemented these schemes.

4.3. Investment into Real Economy 4.3.1. Domestic capital investment The crisis of 2008 drastically changed the situation in the investment sector. During the period from 1999 until 2008 the trend of investment demand expansion with the average annual rate of 112.6% was supported by favorable situation both domestically and in foreign markets. This trend was abruptly terminated by acute crisis in construction and investment complex. In 2009 capital investment slowed down by 15.7% while GDP decline was 7.8%, so this slide of investment was much deeper than during 1998 crisis. The specificity of post-crisis recovery after 2008 was demonstrated in extremely slow recovery rates for business activity in the sphere of investment. In 19992000 increasing the share of capital investment in the overall GDP structure was the key driver for intensive recovery of GDP and hitting the precrisis level of 1997 quite soon shaping the preconditions for dynamic economic growth in the following years. On the contrary, during the three-year period between 2009 and 2011 the share of capital investment in the GDP remained at the same level of 20.4% having led to slow down of recovery after 2008 financial crisis. In 2011 the level of capital investment still did not reach the 2008 level being 3.3% below it.

After financial crisis of 1998 economic recovery was underpinned by active engagement of standby and under-loaded production capacities. This was the key driver of outrunning capital investment rates for major enterprises. However, simultaneously the impeding factors limiting growth were becoming more and more important: high level of fixed assets depreciation and shortage of skilful workforce. Their negative impact was partially compensated by increased economic activity of small and medium sized businesses. Their share of capital investment (in the total volume of capital investment in Russian economy) grew from 10% in 2000 up to 24% in 2008. During this period of time the average annual capital investment growth rates for small and medium sized businesses were significantly exceeding investment performance of major enterprises.

The situation changed drastically in 2009, when in the context of financial and economic crisis the decreased volumes of loans and growing of average weighted interest rate for small and medium sized businesses (up to 20%) led to capital investment in this segment falling down almost by 13.4% versus the preceding year, which negatively impacted the situation in investment sector in general. In 2010 financial support of small and medium sized businesses became of the state priorities: the overall budget appropriations for such support made Rb 17.97bn; capital investment grew by 8.7% versus 2009, and their share in the total volume of investment in the economy grew up to 27.6%. In 2010 the dynamic growth of investment demand in small and medium sized businesses segment compensated the retarded dynamics of capital investment of major companies Fig. 34. Unfortunately, these structural changes were rather of opportunistic character and were not supported by the fundamental changes in the overall investment climate of Russia.

Section The Real Sector of the Economy 2005 2006 2007 2008 2009 2010 ---capital investment without small businesses and investment not observed by direct statistical methods capital investment of small businesses and not observed by direct statistical methods total capital investment of companies including additional estimates for investment not observed by direct statistical methods *preliminary estimates.

Source: Federal Statistics Service.

Fig. 34. Dynamics of capital investment for major companies and small businesses in 20052011, % to the preceding year In 2011 the positive dynamics of investment activities in small and medium sized businesses segment was maintained (Fig. 35). Capital investment rates of small businesses in 2011 were 2.3% higher than in the preceding year, which allowed for hitting the pre-crisis level of 2008. In major companies segment the investment dynamics was positively impacted by implementation of a set of measures from the governments anti-crisis program. In incremental capital investment for major companies was 5.1%, and in 2011 10.1%. Let us note here, that in 2011 increase in capital investment activity by major companies became the driver for improving capital investment growth rates up to 108.3% versus 106.0% in the preceding year (Fig. 35).

22,20 17,16,13,15 12,10,10 9,8,10 10,8,5 8,7,3 7,6,4 6,5,5 5,1 5,4,4,3 4,2,1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 --5,-7,----15,-capital investment GDP Source: Federal Statistics Service.

Fig. 35. GDP and capital investment dynamics in 19982011, % to the preceding year RUSSIAN ECONOMY IN trends and outlooks Over the recent decade the profile of investment by forms of ownership has changed (Fig. 36). The major portion of capital investment falls on private enterprises and organizations, their share in total investment grew from 29.9% in 2000 up to 51.1% in 2008 and 59.4% in 2010. Another characteristic feature is increased share of investment by enterprises and organizations with foreign capital. These investments reached their peaks in 20052007.

In the following years due to lack of systematic measures targeted at investment climate improvement foreign investors suspended their activity.

100,90,80,70,60,50,40,30,20,10,0,2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 12,2 12,2 10,7 11,8 9,7 11,2 10,6 9,8 8,7 8 7,Joint Russian and foreign capital 1,5 2,3 3,6 4,1 6,9 8,2 7,8 7,1 7,5 6,8 5,Foreign capital 27,8 21,6 18,6 17,4 15,5 12,9 12,2 11,1 10,1 7 Mixed Russian ownership (without foreign capital) 29,9 36,7 42,0 41,2 46,5 44,9 47,5 49,7 51,1 55,2 59,Private ownership 4,5 4,9 4,7 4,3 4,1 3,8 4,2 4,4 4,3 3,6 Municipal ownership 23,9 22,1 20,2 21,0 17,1 18,8 17,5 17,7 18,1 19,3 16,State ownership Source: Federal Statistics Service.

Fig. 36. Capital investment profile in the Russian Federation by forms of ownership, % to the outcome During the period of 20002010 investment profile by funding sources also changed. The share of capital investment at the expense of borrowed funds grew, and at the same time investment funded by equity capital fell down to 40.4% in 2007, and even during the post-crisis development in 20092010 it remained below the average level of the preceding years. However, slow recovery rates of domestic market and overall economy income recovery dictated enterprises and organizations using more equity to fund their investment programs in 2011.

As of the end of 2011 the share of equity investment in the overall capital investment grew up to 42.7% and exceeded the preceding year indicator by 1.7 p.p. (Table 9).

Table Capital investment profile by funding sources (without small business entities and investment amounts non observable by statistic methods), % to the outcome 1999 2000 2005 2006 2007 2008 2009 2010 1 2 3 4 5 6 7 8 9 Capital investment, total 100 100 100 100 100 100 100 100 Including by funding sources:

Equity capital 52.4 47.5 44.5 42.1 40.4 39.5 37.1 41.0 42.Section The Real Sector of the Economy contd 1 2 3 4 5 6 7 8 9 Withheld profit (accumulation fund) 15.9 23.4 20.3 19.9 19.4 18.5 16.0 17.1 17.Borrowed funds 47.6 52.5 55.5 57.9 59.6 60.5 62.9 59.0 57.including:

Bank loans 4.2 2.9 8.1 9.5 10.4 11.8 10.3 9.0 7. Including loans by foreign banks 0.6 1.0 1.6 1.7 3.0 3.2 2.3 1. Borrowing from other organizations 5.6 7.2 5.9 6.0 7.1 6.2 7.4 6.1 5.Budget funds 17.0 22.0 20.4 20.2 21.5 20.9 21.9 19.5 18.including:

Funds from the Federal Budget 6.4 6.0 7.0 7.0 8.3 8.0 11.5 10.0 9. Funds from sub-national budgets (RF 9.6 14.3 12.3 11.7 11.7 11.3 9.2 8.2 7.constituents) Extra-budgetary funds 8.6 4.8 0.5 0.5 0.5 0.4 0.3 0.3 0.Others 12.2 15.6 20.6 21.7 20.1 21.2 23.0 24.1 25.including:

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