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Superior organizations funds 10.6 12.5 11.3 13.8 15.9 17.5 20. Funds received from share participation 3.8 3.8 3.7 3.5 2.6 2.2 1.in construction (from organizations and individuals) Including funds from the citizens 1.3 1.5 1.9 1.3 1.2 1. Funds from issuing corporate bonds 0.3 0.04 0.1 0.1 0.1 0.01 0. Funds from capital stock issues 0.7 0.5 3.1 2.3 1.8 0.8 1.0 1.1 1.Within overall capital investment 4.7 6.6 6.9 5.4 4.3 4.3 3.8 3.foreign investment Source: Federal Statistics Service.

Change of the borrowed funds volumes and shares in the overall funding sources profile was accompanied by some structural change. The demand for products and services of Russian enterprises on behalf of the government was supported by implementation of the planned investment projects in transportation, ICT and some other spheres within the framework of federal target programs and Federal Targeted Investment Program (FTIP), as well as by implementation of major infrastructure programs of the Investment Fund. In accordance with the government investment priorities such funds were mostly channeled for modernization and development of strategically important production infrastructure sites, implementation of investment projects focused on introduction of state-of-the-art technology to improve competitiveness of Russian mechanical engineering products, as well as improvement of industrial safety in energy, transportation, waters and forests management. In the crisis environment the government provided incentives for introducing innovations through implementation of producible federal target programs. Appropriations for such programs were either maintained at the previously planned level, or immaterially reduced. The share of budget appropriations channeled into capital investment made 3.1% of GDP in 2009 versus 2.54% of GDP in 2007, including Federal Budget appropriations making 1.62% of GDP in 2009 versus 0.98% of GDP in 2007. In 2010 the share of budget funds used as capital investment grew even more and made 2.87% of GDP, and then immaterially decreased in 2011 making 2.66% of GDP.

Similar dynamics was observed for investment at the expense of the Federal Budget 1.47% of GDP and 1.39% of GDP respectively (Fig. 37). In 20102011 the ratio between the Federal Budget and regional budgets appropriations channeled to investment changes. In the overall amount of investment at the expense of budget appropriations the Federal Budget share in 2011 was increased up to 52.2% versus 38.2% in 2008.

RUSSIAN ECONOMY IN trends and outlooks 4,3,40 3,3,3,3,3,2,86 2,3,2,2,2,68 2,2,2,2,2,1,2,1,1,1,30 1,1,0,0,93 0,0,86 0,0,0,1,00 0,0,0,0,1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Share of budget approriations for capital investment Share of Federal Budget approriations for capital investment Source: Federal Statistics Service.

Fig. 37. Share of budget appropriations for capital investment during the period of 19992011, % to GDP In 2011 it was planned to channel Rb 895.0bn from the Federal Budget to construction, revamp, technical re-equipment and acquisition of facilities, as well as to implement major integrated investment projects included into Federal Targeted Investment Program, including budget investment of Rb 769.6bn (subsidies Rb 125.4bn)1.

As of the end of 2011 taking into account all the changes actual Federal Budget funds allocated for construction and measures within Federal Targeted Investment Program constituted Rb 946.0bn (1.74% of GDP) exceeding 2010 level by Rb 181.6bn.

In 2011 Rb 573.8bn (60.7% of total FTIP investments) were allocated for projects included into federal target programs (program element of FTIP). Rb 372.2bn were allocated for construction of facilities and implementation of measures beyond federal target programs (39.3% of total FTIP investments). Rb 160.2bn were reserved within FTIP for funding specialized work associated with State defense order in 2011 (16.9% of total FTIP investments).

According to the Federal Statistics Service (Rosstat), the level of budget appropriations for FTIP construction sites and facilities (without account of special facilities included into state defense procurement) monitored by Federal Statistics Service in January-December made Rb 504.6bn, i.e. 70.9% of the annual limit (Table 10).

In accordance with the Federal Targeted Investment Program for 2011 as amended by January 1, 2012, budget appropriations were made for construction and acquisition of 3842 sites with 2226 sites to be commissioned. In reality 500 sites were commissioned in Starting from 2011 Federal Targeted Investment Program includes not only Russian Federal property and property of legal entities not being state or municipal institutions / unitary enterprises, but also capital construction property of the RF constituents (regional governments) and municipal property co-funded out of the Federal Budget.

Section The Real Sector of the Economy 2011: 425 at full capacity, 75 partially. As of January 1, 2012, technical availability for 876 sites was within the range from 51.0% to 99.9%.

Table Sites included into FTIP and CAPEX funded out of the federal budget in 2011 (without account of sites included into state defense procurement) Number of sites in Commissioned in Limit of state CAPEX 2011 2011 for 2011 Utilized inFunded Including vestment Including out of those with at full from all fund Federal funded out total commission- capac- partially total ing sources in of the federal Budget ing deadline ity budget in sites Rb bn Total 3842 2226 425 75 771.4 711.6 504.6 515. including: 1110 532 127 11 295.3 276.9 248.9 237.transport complex agricultural complex 184 107 49 13 8.6 8.4 7.7 6.special complex 753 545 111 14 55.3 50.4 31.0 31.social complex 1611 966 131 34 362.6 332.8 186.2 214.Other sites 184 76 16 3 49.5 43.0 30.8 25.Source: Federal Statistics Service.

At the expense of annual limit in 2010 Rb 504.9bn were allocated out of the Federal Budget (70.9% of total annual appropriations) and Rb 51.0bn were allocated out of regional budgets (69.4% of the overall funds of regional budgets). In January-December 2011 state customers utilized Rb 515.5bn of state CAPEX, i.e. 66.8% of the annual limit of construction appropriations. The level of budget funding utilization of the total actual appropriations at the expense of all funding sources made 92.8%.

Prior to 2008 crisis the amount of borrowed funds for investment was growing due to increased activity of the banking sector, growth of citizens investment into housing construction and intensive in-flow of foreign capital. In 2009 absolute shrinkage of bank loans for investment purposes was registered. The key factors suppressing further deepening of the crisis at the investment market during that period were: growth of loans from foreign banks and active borrowing from other companies1. The share of loans from foreign banks for capital investment in the overall banks loans made 31.4% and reached its maximum over the last decade.

In 2010 the trend of decreasing the share of bank capital and borrowed funds in the overall capital investment started to decrease: out of Rb 2,769.0bn of total borrowed funds Rb 559.2bn fell on bank loans, i.e., 14.8% versus 18.4% in 2008. In this context in 2010 given the trend for stabilization of loans for capital investment issued by Russian banks, loans from foreign banks decreased by Rb 62.5bn and determined the aggregate decrease of bank loans share in the overall funding of capital investment. In 2011 growth of loans from Russian banks fully compensated for decrease of loans from foreign banks. During one year period incremental loans for capital investment issued by Russian banks made Rb 46.0bn (Fig. 38) According to the Methodology Regulations for Statistical Indicators in Construction and Capital Investment (Order by the Federal Statistics Service No.37 issued on March 11, 2009) borrowed funds for capital investment include: bank loans, share sale revenues, charity donations and other contributions, funds from superior jointstock companies (holdings, industrial and financial groups) on a grant basis; funds borrowed from other organizations including loans from the government on a pay-back basis, loans from foreign investors, bonded debt, loans from institutional investors: equity funds and investment companies, insurance companies, as well as promissory notes and other funds. See, RUSSIAN ECONOMY IN trends and outlooks 700,600,500,400,300,200,100,0,200 200 200 200 200 200 200 200 200 200 201 0 1 2 3 4 5 6 7 8 9 0 24,5 47,1 72,2 94,9 129, 207, 305, 457, 593, 427, 429, 475, loans from Russian banks 6,2 11,5 12,9 21,3 26,9 27,9 59,2 86,9 198, 195, 130, 119, loans from foreign banks Source: Federal Statistics Service.

Fig. 38. Bank loans for capital investment in 20002011, Rb bn 1550,983,933,521,345,259,230,1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 foreign investment, total direct foreign investment capital investment Source: Federal Statistics Service.

Fig. 39. Indices of capital investment, foreign investment and direct foreign investment during 19982011, % of 1997 level During the period of 19982007 foreign investment into Russian economy increased 9.times, including direct foreign investment growth of 5.2 times. This resulted in increased share of foreign investment and loans from foreign banks in funding capital investment. ForSection The Real Sector of the Economy eign investment share in the overall capital investment into Russian economy grew from 4.7% in 2000 up to 5.4% in 2007.

2008 crisis featured greater decrease of foreign investment into Russian economy versus domestic investment. Besides, net capital flight (disinvestment) reached its historic maximum of $ 133.9bn in 2008 fully offsetting the positive trends of the preceding two years (Table 11).

In 20092011 the foreign investment profile transformed due to sharp decline of the amount and share of direct investment and increase of other investment. In 2010 foreign investment into Russian economy constituted 94.8%, and direct foreign investment constituted 49.7% of 2007 level. At the same time domestic investment decreased by 1.8%. In 2011 direct foreign investment grew by 33.3%, but they still constituted only 2/3 of the pre-crisis level of 20072008. The situation was aggravated by the trend to capital flight which persisted during the last three years. Net private capital export in 2009 was making $ 56.9bn, and in 2011 $ 84.2bn. Eventually the share of foreign investment in the total capital investment fell down to 3.1% in 2011 versus 3.8% in 2010.

Table Net private capital import/export as per balance of payments, $ bn Net capital import/export Net capital import/export Net capital import/export in private sector by banks in other sectors 1998 -21.7 -6 -15.1999 -20.8 -4.3 -16.2000 -24.8 -2 -22.2001 -15 1.3 -16.2002 -8.1 2.5 -10.2003 -1.9 10.3 -12.2004 -8.9 3.5 -12.2005 -0.1 5.9 -2006 41.4 27.5 13.2007 81.7 45.8 35.2008 -133.9 -56.9 -76.2009 -56.9 -30.4 -26.2010 -33.6 15.9 -49.2011 -84.2 -26.2 -57.Q1 -20.1 -7.7 -12.Q2 -7.3 -2.6 -4.Q3 -19.0 -8.5 -10.Q4 (estimate) -37.8 -7.5 -30.Source: Central Bank of Russia.

In 2009 we can observe a turning point of such trend in the sphere of housing construction.

After pretty sustainable growth of housing construction during the period of 20012008, in 20092010 housing commissioning declined by 8.9%, including commissioning of housing funded by citizens and borrowed funds by 6.9% versus the pre-crisis level of 2008.

In H1 2011 the decline in housing commissioning was making 3.7% versus similar period of the preceding year. The situation changed in Q3 2011, when housing commissioning grew by 15% versus similar period of the preceding year, and as a result as of the end of the year the increment of commissioned housing made 6.6% of 2010 level. At the same time 26.7m sq.

m was commissioned in 2011 at the expense of citizens funds and borrowed funds, which exceeds the level of the preceding year by 1.4m sq. m. As for housing commissioned at the expense of companies/organizations funds, it demonstrated growth by 3.5m sq. m.

The share of individual housing construction in the overall housing commissioned declined and in 2011 made 42.9% versus 43.7% in 2010 and 47.7% in 2009. Investment activity of the population in 2011 was supported by growing demand for loans in the context of decreasing RUSSIAN ECONOMY IN trends and outlooks the interest rates. However, the impact of this growth on the dynamics of housing commissioning is determined by the time lags within the construction cycle and is visible beyond the preceding year. The amount of issued residential loans in 2011 made Rb 749.2bn (1.38% of GDP) versus Rb 418.2bn (1.28% of GDP) in 2010, including Rb 693.8bn in mortgages (0.93% of GDP) versus Rb 346.6bn (0.77% of GDP) one year before.

Absolute growth of investment into housing construction (by Rb 25.5bn) was observed in 2011, including growth by Rb 14.5bn at the expense of citizens funds invested into construction under shared ownership terms (Fig. 40). However, in the overall capital investment in the economics the share of investment into housing construction in 2011 went down to 1.9% versus 2.2% in 2010 and 3.5% in 2008.

In the capital investment profile by types of fixed assets the share of housing construction expenses decreased in 2011, while the share of expenses for non-residential construction was decreasing (Table 12). Total area of non-residential buildings grew in 2011 by 9.9% versus the preceding year. Along with the increase of share of expenses for industrial construction the share of investment into machines and equipment acquisition was also growing. Let us notice that in 2011 given the unstable dynamics of domestic capital goods production, the share of investment into acquisition of imported machines, equipment and transportation vehicles (without small business entities) in the total investment into machines, equipment and transportation vehicles made 18.6% versus 18.0% in 2010.

2006 2007 2008 2009 2010 94,5 115,5 107,7 81,1 51,8 62,organizations funds invested into construction under shared participation terms 50,2 78,5 124,6 76,9 69,6 84,citizens funds invested into construction under shared participation terms Source: Federal Statistics Service.

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