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Section 4. The Real Sector of the Economy 4.1. The Macrostructure of Production 4.1.1. Main Trends and Factors of Economic Development in The macroeconomic situation throughout the year 2010 was characterized by an unstable dynamics of its main indices. Growth over the years first half, which was sustained by the favorable conditions on the world raw materials market, in the second half-year gave way to a slower rate of economic development due to the effect of certain structural features of the domestic market.

While in the first half-year 2010 the reestablished positive dynamics of investments in fixed assets and an increasing retail turnover resulted in an acceleration of the rate of GDP growth, in Q III the dominant factor that was influencing the value of that index was the slowdown of the rate of industrial production growth and the declining volumes of agricultural production. In the first half-year 2010 the value of production index in agriculture amounted to 102.9 %, followed in Q III by a drop by 18.6 % on the same period of 2009. As a result, in Q III 2010 the rate of GDP growth declined to 2.7 % against 5.2 % in Q II and 3.1 % in Q I of the same period of the previous year. Besides, in Q III the situation was further complicated by the diminished effect of the external factors on the dynamics of economic growth.

In Q IV 2010, the impact of the factors created by an expanding investment and consumer demand proved to be sufficiently strong to compensate for the diminished volumes of agricultural output, and so the growth rate of GDP, according to preliminary estimates, rose to nearly 5.2 % on the same period of the previous year. As a result, GDP growth in 2010 amounted to 104 % as compared to the previous years level.

The structural peculiarities of the rehabilitative growth in 2010 were determined by an accelerated growth of investments in fixed assets (106.1 % against the 2009 level) and retail turnover (104.4 %). The industrial production growth index in 2010 amounted to 108.2 % of its previous years level, including that for the processing industries to 111.8 %, for the extracting industries to 103.6%, and the production and distribution of electric energy, gas and water to 104.1 % The agricultural production volume amounted to 88.1 % of its 2009 level.

The dynamics of GDP was positively influenced by a rapid revival of exports. As demonstrated by the results of 2010, the physical volumes of exports (as estimated by the methodology based on the system of national accounts (SNA)) rose by 11.1 % on 2009, and so became 5.9 % higher than the level registered in the crisis year (Table 1).

The slowdown in the rate of economic growth throughout the year 2008 and the economic decline in 2009 resulted from the simultaneous shrinkage of external and domestic demand. A comparative analysis of the conditions and factors that determined Russias exit from crisis in 1998 and 2008 has shown that in both cases the determining factor was a favorable change in the external economic situation. From Q II 2009 onwards, alongside the gradual revival on the world raw materials markets and the adaptation of financial and credit institutions to the crisis situation, the rate of economic decline was also gradually becoming less pronounced.

The situation in Q IV 2009 and Q I 2010 was determined by a robust growth in exports, and from Q II 2010 also by the reestablished positive development of the domestic market.

When analyzing the influence of the changes and structure of foreign trade turnover throughout the crisis year 2009, one should take into consideration the fact that the decline in the RUSSIAN ECONOMY IN trends and outlooks physical volume of exports was rather mild in face of the plummeting volumes of imports. As a result, in 2009 for the first time after the 1998 crisis the rate of growth of net exports became positive, and thus produced a positive influence on the macroeconomic indices. In 2010, however, this trend disappeared. The shrinkage in the volume of exports in absolute terms was registered since Q II 2010, and the effects of the foreign trade component in the second half-year became markedly weaker (Fig. 1).

Table Main Macroeconomic Indices for 2009 2010, As % of a Previous Years Level 2009 Per Q Per Q annum I II III IV annum I II III IV Gross domestic product 92.1 90.7 89.0 91.4 97.1 104.0 103.1 105.2 102.7 105.0* Investments in fixed assets 83.8 82.7 77.2 81.8 90.6 106.1 95.9 105.3 107.2 112.8* Housing put in operation 93.5 102.5 99.7 98.8 86.4 97.0 91.7 107.5 85.9 100.Production volume in construction 84.0 80.7 80.7 82.8 89.3 99.4 91.9 99.9 102.2 105.Industrial production volume 90.7 84.5 86.4 90.4 101.8 108.2 109.5 110.9 106.4 106.Extraction of mineral resources 99.4 94.9 97.3 99.9 105.4 103.6 106.7 104.8 101.3 102.Processing industries 84.8 76.1 79.3 85.0 100.0 111.8 112.1 116.3 109.5 109.Production of electric energy, gas and water 96.1 94.9 94.5 94.0 101.4 104.1 107.7 102.6 103.9 101.Agricultural product 101.2 102.3 100.8 99.0 105.2 88.1 103.6 102.3 81.4 91.Cargo turnover in transport 89.8 82.8 82.2 93.1 102.0 106.9 111.6 113.0 101.7 102.Cargo turnover in transport 95.1 100.4 94.9 91.4 94.5 104.4 101.7 105.3 105.9 104.Commercial services to the population 95.8 99.1 95.3 93.6 95.6 101.4 99.9 101.6 101.5 101.Foreign trade turnover 64.9 56.2 55.4 59.9 91.0 130.9 144.1 139.0 125.9 119.9* Real disposable money incomes 102.3 100.7 103.4 96.6 108.2 104.3 107.4 103.2 104.4 102.Real wages 96.5 99.2 96.1 94.8 99.3 104.2 103.1 106.1 105.1 102.Total number of unemployed 131.7 134.8 152.1 132.2 112.3 89.1 96.3 86.7 87.2 85.Number of unemployed, officially 148.9 126.5 157.4 163.0 152.3 90.0 114.2 91.1 81.0 91.registered * Preliminary estimates.

Source: Rosstat.

25,20,15,10,5,0,I II III IV I II III IV I II III IV I II III IV -5,200720082009 2010 2007 2008 2009 -10,-15,-20,domestic market external market (exports) GDP Source: Rosstat.

Fig. 1. GDP Changes, by Domestic and External Demand Components in 2008 2010, As % of the Same Quarter of a Previous Year Section 4.

The Real Sector of the Economy The specific combination of the rates of domestic and external demand had a decisive effect on the peculiarities of the post-crisis revival observed in 2010.

The initial conditions for the exit from the crisis were marked by a 9.8 % drop, in 2009, of the physical volumes of output displayed by the main types of economic activity on the previous year, and a drop in the volume of imports by 30.4 %. The plummeting volume of imports had a major impact on the dynamics and structure of the domestic market, because since the Russian economy had been characterized by an upward trend displayed by the share of imports in trade turnover and investment expenditures. The high share of imported commodities was determining an adequate balance of demand and supply also on the investment market. Although the dynamic growth of imports was conducive to the emergence of a competitive environment, the high share of imports in retail turnover and in the volume of investments in machinery, equipment and means of transportations was increasing the dependence of the domestic markets balance of commodity resources on the changes in the foreign economic situation. The simultaneous large-scale decline in the volumes of domestic production and imports in the crisis years 2008 2009 was determining the specificity of the structural changes that occurred on the domestic market. Early on in the crisis, the cumulative effects of the shrinking demand, declining incomes of enterprises and the population alike, and the drop in the rubles exchange rate resulted in a strengthened position of Russian producers on the domestic market. However, in contrast to the period of 1999 2000, no leap in the level of domestic production occurred this time, because while in 1999 2000 the positive changes in domestic production resulted from an active involvement of idle competitive capacities and an accelerating rate of investments in fixed assets, the main factor that determined the improved situation on the domestic market in the first half-year 2009 was the availability of accumulated finished products.

The macroeconomic situation started to change from the second half-year 2009, when the rate of economic decline began to slow down in response to the gradual rebound of the foreign market and the revival production in the extracting sector of industry. In Q I 2010 the trend toward stabilization on the domestic market strengthened due to the reestablished positive dynamics of domestic production and imports. However, alongside a very slow revival of domestic production of commodities and services for the domestic market, since early an expansion of imports has been registered. While growth on the domestic market amounts to 6.2 %, and that of imports to 25.4 %, the growth of domestic production of commodities and services for domestic consumption is estimated to be at the level of 1.3 %, and that for the foreign market at the level of 11.1 %. The end of the 1998 crisis was characterized by stabilization, in 1999, of domestic production for the domestic market in face of a remaining downward trend displayed by the level of imports. In the period of 2000 2007, the rate of domestic production of commodities and services was persistently increasing, while at the same time, in terms of average per annum growth rate (which amounted to 107.3 %), it was lagging behind both imports (119.7 %) and exports (108.4 %) (Fig. 2).

RUSSIAN ECONOMY IN trends and outlooks 40,30,20,10,0,I II III IV I II III IV I II III IV* -10,1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 / 2008 2009 -20,-30,-40,domestic commodities and services for domestic market -50,00 imports external demand domestic market * preliminary estimates.

Source: Rosstat.

Fig. 2. Changes in the Growth Rate of Domestic Demand in 1999 2010, by Component, As % of the Same Period of a Previous Year As the influence of imports on the domestic market became stronger in 2009 2010, it caused some negative shifts in the overall supply structure where the share of imports in investment commodities was rapidly shrinking against the backdrop of a reorientation toward the other two types of commodities intended to satisfy consumer and intermediate demand (Table 2).

Table Shares of Consumer, Intermediate and Investment Commodities in the Russian Federations Total Imports (Based on Balance of Payments), as % of Result Type of commodity Consumer Investment Intermediate Q I 45.0 22.6 32.Q II 41.3 23.9 34.Q III 43.6 24.2 32.Q IV 37.8 24.4 37.Per annum 41.8 23.8 34.Q I 46.8 18.6 34.Q II 44.0 18.1 38.Q III 42.9 20.6 36.Q IV 43.9 19.5 36.Per annum 44.3 19.7 36.Q I 43.5 16.8 39.Q II 39.5 18.7 41.Q III 42.1 19.8 38.Source: Rosstat.

Section 4.

The Real Sector of the Economy The emergence of this trend was followed by an increasing share of imports in the retail commodity resources. The opposite trend observed in 2009, when the share of imports in retail commodities was shrinking, had disappeared. Thus, the share of imports throughout was systematically increasing, having achieved by Q III the level of 47 % (Table 3).

Table Structure of Retail Commodity Resources in 2009 - 2010, % Including Retail commodity resources Domestic production Domestic production Q I 100 55 Q II 100 60 Q III 100 59 Q IV 100 61 Year 100 59 Q I 100 56 Q II 100 58 Q III 100 53 Source: Rosstat.

An analysis of the dynamics of economic development broken down by component of external and domestic demand can serve as an illustration of its very high dependence on foreign trade. Lack of any significant structural changes, the development by inertia of both exports-oriented and end-demand production (based on extensive use of basic factors), and a high share of imports in the resources available on the domestic market were determining the low competitive capacity of the Russian economy in conditions of the post-crisis rehabilitative growth in 2010.

4.1.2. Main Characteristics of the Use of GDP The year 2009 saw a reversal of the formerly upward trend in the growth of investments (which could be observed throughout the entire period of 2000 2008), and so, for the first time since the 1998 crisis, a decline in the rate of investments in fixed assets was recorded that was much more rapid than the changes observed in the dynamics of GDP. Over the year 2010, the rate of investments in fixed assets was initially, in Q I, determined by the effect of the previous years factors. From Q II 2010 onwards, the value of this index became positive, while the rate of quarterly growth began to accelerate. By the end of 2010, the rate of growth displayed by investments in fixed assets amounted to 106.0 %, which is by 2 p.p. higher than the rate of GDP growth. However, when estimating the significance of that index, one should take into consideration the low base provided by its level recorded in 2009, when the decline of investments in fixed assets amounted to 16.2 % and was much more pronounced than in the crisis year 1998. As a result, in 2009 the index of investments in fixed assets amounted to 88.8 %, and that of GDP to 95.9 % of the 2008 level (Fig. 3).

Against the backdrop of a global crisis and the dwindling incomes of the national economy, from late 2008 onwards there occurred a change in the gross national savings to end consumption ratio. As demonstrated by the results of the year 2009, the share of gross savings in GDP fell to 24.3 %, which is comparable to the value of that index recorded in the crisis year 1998. In 2010, the share of savings in GDP increased to 28.0 %, while remaining well below the average level recorded in the period of 2004 2008 (33.4 %).

RUSSIAN ECONOMY IN trends and outlooks 22,17,15 16,13,12,10 10,10,8,8,2 9,7,7,6,6,5,1 5,4,4,5,2,1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 --5,-7,---16,--Investment in fixed capital GDP Source: Rosstat.

Fig. 3. Changes in Dynamics of GDP and Investment in Fixed Assets in 1998 2010, As % of the Previous Year In face of the then existing situation on the market for capital and savings resources, the share of investments in fixed assets in GDP in 2009 dropped 19.4 % by comparison with the last decades historic high of its average value of 20.7 % (recorded in 2007 2008). However, in 2010 the share in GDP of investments in fixed assets climbed to 20.5 % due to the strengthening trend towards savings transformation (Table 4).

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