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Under existing internal demand and production dynamics expansion rates the dependence of the market filling from the machinery and equipment import and this year also from the consumer goods, including foodstuffs. The solution of the problem of economys modernization under existing dynamics and structure of domestic investment goods production (share of import machinery and equipment in investments in fixed assets being in the range of 7-9%) depends considerably on the nature of foreign economic activity development.

Against the background of high economic growth rate sustention Russian economy remains an attractive sphere for foreign investors. Volumes of foreign investments increasing extraordinary rapidly in 2007, the accumulated foreign capital in Russian economy is equal to USD 221.0 bln, exceeding by 45.9% the figure of the previous year. In 1st quarter 2008 however inflow of foreign investments were 70.1% of the level of the corresponding period of the preceding year, and of direct investments 57.2%. The trend for the increase of capital import, which was observed since 2nd quarter 2006, as a result of 1st quarter 2008 was replaced by the opposite one: net export of private capital was equl to USD 22.8 bln, as compared with the inflow of USD 13.5 bln in the corresponding period of the previous year. It is possible that it is the political and economic factors that influenced the change of the trends in the dynamics of foreign investments and domestic capital outflow.

Expansion of consumer demand was supported by the positive dynamics of populations incomes growth. Increase in populations real incomes in January-April 2008 was equal to 11.8%, of real wages to 13.1%, real amount of accrued pensions 19.1% to the corresponding quarter of the previous year.

Structural shifts in distribution of the population by the amount of average incomes per capita went on. In 1st quarter 2008 average per capita incomes increasing by 26.1% and the nominal rate of wages by 28.7% as compared with the previous year, the share of population with the average per capita incomes above RUR 25000 expanded by 4.6 p.p., in the range of RUR 25000-10000 by 3.1 p.p., and below RUR 8000 reduced by more than 12.2 p.p. However this was accompanied with the increase in differentiation by monetary incomes in 1st quarter 2008 funds coefficient was equal to 15.6 times (15.1 times in 2007, 14.6 times in 2006) and Gini coefficient to 0.412 (0.408 and 0.0.404 in and 2006).

It should be noted that the decrease in the share of incomes from entrepreneurial activity and property by 1.6 p.p. is observed against the background of the trend for the increase in labor remuneration proportion in populations incomes up to 70.5% against 69.4% in1st quarter 2006.

Employees labor remuneration is the main source of incomes for the majority of the population and average monthly wages in various kinds of activities differing considerably it has a significant impact on labor forces flow. Whereas in March 2008 average monthly wages accrued in minerals extraction was 2.3 times and in financial activity by 2.8 times bigger than all-Russian level of average wages, in processing industries this figure was equal to 95%, in education to 65% and in health care - to 75%.

In general existing of a significant gap between real wages growth rates and labor efficiency was characteristic for the economy at the beginning of the current year. Whereas in January-March they were equal to 8.5% and 6.1% and in January-March 2007 to 13.1% and 6.9%, in January-March 2008 to 13.1% and 6.9%, correspondingly.

The nature of incomes distribution defined the peculiar features of current expenditures dynamics and level of savings in the households sector.

Over the last seven years changes in the structure of consumers expenditures were determined by the expansion of the proportion of expenditures for non-food goods and services, proportion of expenditures for foodstuffs reducing.

This year index of consumers prices was equal to 106.3 over 4 months as compared with 104.0% in January-April 2007, prices for foodstuffs growing by 8.0% against 3.3%, for non-food goods by 2.9% against 1.5%, prices for paid services changing approximately at the level of 1st quarter of the previous year (8.5%).

Inflation rates accelerating, the expansion of the share of expenditures for purchase of goods is observed, the inclination of the population to save, including savings in organized forms, declining. It should be noted that in February- April of the current year the reduction in volumes of credits rendered to the natural persons was observed.

Table Structure of Populations Monetary Incomes Use, as percentage 2007 I II III IV I 100.0 100.0 100.0 100.0 100.Monetary incomes - total of which used for Goods purchase 56.4 52.7 54.7 51.7 58.Payment for services 17.7 16.7 16.6 14.1 16.Compulsory payments and fees 12.8 12.4 12 13 12.Savings 9.8 8.5 6.8 10.6 8.Of which in the form of deposits and securities 5.7 7.3 5.6 7.5 2.Purchase of foreign currency 5.2 5.3 5.2 5.2 6.Cash held by populations -1.9 4.4 4.7 5.4 -2.Source: Federal State Statistics Service Increase in real monetary incomes is forecast to be 13.5%, in real wages 16.7% as compared with 2007. Owing to this fact, the suggestion of the government to make additional financing of programs in the social sphere will undoubtedly effect the level of consumers activity positively, however government expenses growing further aggravation of inflation background is to be expected. This year prices growth rates for processing production are observed to be accelerating by 5.4 p.p. as compared with January-April 2007 and for electricity, gas and water production and distribution - by 4.5 p.p.

According to IET estimations increase in investments in fixed assets will be equal to 19.4%, industrys growth index being 104.9% and processing industries index to 108.0%.

Business Survey in May S. Tsukhlo In May acceleration of demand growth rates enabled Russian industry to increase production growth rates as well. Satisfaction with sales is However, lower at the moment than it was in 2007.

Further demand growth can make the situation with equipment and staff shortage, which stabilized at the beginning of 2008 in the environment of comparatively low sales growth rates, more acute. Only 52% of enterprises had enough investments to satisfy the growing demand.

According to the data of the official statistics, in April 2008 there were by 9.2% more industrial production put out than in April 2007 (similar result for the first quarter by 6.2%). The calculations of the Center for Macroeconomic Analysis and Short-Term Forecasting, taking into account the difference in the number of working days, demonstrate the growth by 7.8% as to last April. As compared to March 2008, the output went up by 0.5% in April (corresponding figure for March 0.7%).

CHANGES IN PRODUCTION, SEASONALITY % EXCLUDED (BALANCE=%GROWTH-%DECREASE) EXPECTED REAL --1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/CHANGES IN SOLVENT DEMAND, SEASONALITY EXCLUDED (BALANCE=%GROWTH-%DECREASE) % EXPECTED -REAL ----1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/Surveys live data demonstrate increase of the industrial growth intensity in May 2008. Growth rates (balance of changes) cleared from seasonality exceeded that of April by 3 points and turned out to be the best over the last 12 months. Additional exclusion of occasional fluctuations produced similar results. Quite stable output growth rates observed over recent months may be succeeded by more intensive development of Russian industry and further increase facilities load. At the moment (2nd quarter 2008) this figure exceeds 74%, which is an absolute maximum over 1993-2008. In metallurgy load is already equal to 88%, in wood processing industry to 77%, in chemistry and petrochemistry to 76%, in light industry 73%, in machine-building to 70%.

It is the dynamics of the demand for the goods produced by enterprises that gives grounds for more intensive growth of output. In May intensity of sales growth after exclusion of seasonality was the highest since June 2007, and after exclusion of occasional fluctuations as well the highest since September 2007. The volumes of production sales are, however, not as big as they could be in the opinion of the producers. Over 5 months of 2008 satisfaction with the demand in Russian industry is only 64%, whereas in 2007 it was equal on average 69%. Decrease in the level of satisfaction with the demand is observed in the majority of the branches of industry in 2008. the biggest drops in this figure are registered in the light industry (41% after 56%), wood processing complex (60 after 73) and machine-building (61 after 66). In metallurgy and chemistry industry demand estimations have not changed so far.

Relatively low demand growth rates in the first half of 2008 prevented further aggravation of the situation with provision of the Russian enterprises with production facilities and staff. In 2008 shortage of facilities stabilized at the level of 21%, shortage of staff at the level of 25%. Due to expected changes in demand the enterprises lack equipment and staff. In 2007 investments contributed to diminution of facilities shortage in the industry, but this was not crucial. Their volumes were regarded as sufficient (again in connection with the expected changes in demand) by only 52% of the enterprises.

At the same time this is the best value of this figure over 12 months of its monitoring. Furthermore it is the first time when the share of enterprises with the sufficient amount of investments is bigger than those with insufficient.

ESTIMATION OF INVESTMENTS ADEQUACY IN CONNECTION WITH THE EXPECTED DEMAND, AS PERCENTAGE , % 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 It is the lack of own financial funds (69% of citations in 2008) that enterprises regard as one of the main obstacles for their investment activity. Decrease of this factors restricting influence that started in 2004-07 was interrupted by construction boom and inflation acceleration (which caused growth of prices for equipment and construction and installation works the frequency of this obstacles citation went up to record-breaking 46%), as well as let-down of the banking sector (high interests rates and difficulties connected with long-term credits receipt).

Labor efficiency in Russian industry satisfy at the moment 68% of the enterprises and only 28% consider it to be below the norm. Thus, only a quarter of enterprises in the Russian industry takes side of the exterior observers. The highest level of dissatisfaction is registered in the wood processing complex (35%) and machine-building (33%).

Forecasts for changes in the demand have not altered since the beginning of 2008. Expected demand growth rates cleared from the seasonal fluctuations are for the fifth month in a row in the range from 20 to 24 balance points (historical maximum 24 points). Exclusion of the occasional fluctuations narrows this range to 21-22 points (historical maximum 22 points). Obviously, Russian industry sets hopes for steady and high sales growth of their production. Enterprises production plans are also steady in 2008. Expected output growth rates (seasonality excluded) change from 35 to 39 points, occasional fluctuations excluded from 35 to 37 points.

Foreign Trade N. Volovik In March 2008 the development of the Russian foreign trade proceeded in the environment of a favorable foreign economic situation, ruble appreciation and increase in solvent internal demand, owing to which facts high growth rates of import and export supplies sustained.

Representatives of the Ukraine made an appeal to the secretariat of the World Trade Organization (WTO) to conduct bilateral negotiations with Russia in the process of Russias accession to the WTO.

In March 2008 Russias foreign trade turnover calculated on the basis of balance-of-payment methodology, was equal to USD 62.8 bln, which is by 43.3% more than foreign trade turnover in March 2007. Russian export went up by 48.8%, which is the maximum figure over the whole period of monitoring, being USD 39.5 bln. Import increased by 37.1%, reaching the level of USD 23.3 bln. Foreign trade balance of the Russian Federation in March 2008 increased by 68.9% as compared with the corresponding period of 2007 (up to USD 16.3 bln).

2000 2001 2002 2003 2004 2005 2006 2007 Export IImport Balance Source: Central Bank of the Russian Federation Figure 1. Main Indices of Russian Foreign Trade, as USD bln In January-March 2008 export of goods increased by 52.8% as compared with the corresponding period of last year (in January-March 2007 by 6.9%). Export growth was mainly connected with a considerable growth of world prices for oil, which started in September 2007. In 1st quarter goods import increased by 39.8% (in January-March 2007 by 39%). High import growth rates are sustained due to the accumulation of profits in the economy, Russias currency appreciation as compared with US dollar (by 10.6% as to the corresponding period of the previous year) and further development of consumers crediting market. As a result, foreign trade balance increased by 72.4%, being equal to USD 49.9 bln. Coefficient of foreign trade non-balance (ratio of balance to foreign trade turnover) was equal to 0.29 in 1 quarter as compared with 0.25 in January-March 2007.

Jan Jan Jan Jan Jan Jan Jan Jan Jan May Sept May Sept May Sept May Sept May Sept May Sept May Sept May Sept Average price of oil grade Brent in March exceeded USD 100 per barrel. OPEC is of opinion that oil market is sufficiently well-provided. At the same time the price for oil is growing, despite the increase of stock reserves. Current situation at the world oil market, having no precedents in the period of monitoring over world prices for oil, depends on the operation of mighty market powers, including on new situation of the financial market. Investors use goods market for protection against inflation and dollar exchange rate drop.

As a result of monitoring over March-April average price for oil grade Urals was equal to USD 102.75558 per barrel. The dynamics of the world prices for oil, products generally followed the dynamics of prices for oil.

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