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The respective results allowed the analysts to employ the non-harmonic price trend decomposition to build forecasts of price dynamics in Moscow and Russian cities basing on a mathematical forecast-model, which consists of a system of equations117.

The price rise dynamics forecasts (in USD equivalent) for a number of cities for 2008 09 are given in Table 23.

Table Forecast of Price Dynamics in Russian Cities in 20082009 (Ranked by Descending Increments over the Three Years) Price rise indices City (region) 2007/2006 2008/2007 2009/2008 2008/2006 2009/Ulyanovsk 1.45 2.01 1.28 2.91 3.Novosibirsk 1.417 1.70 1.45 2.41 3.Perm 1.58 1.64 1.31 2.59 3.Tver 1.34 1.43 1.51 1.91 2.St. Petersburg 1.23 1.84 1.22 2.39 2.Yekaterinburg 1.083 1.80 1.30 1.95 2.Rostov-on-Don 1.28 1.69 1.17 2.17 2.Yaroslavl 1.09 1.79 1.17 1.65 1.Moscow 1.124 1.48 1.09 1.67 1.Izhevsk 1.015 1.64 1.05 1.66 1.Moscow oblast 1.006 1.68 1.001 1.69 1.According to the forecast, in 2008, the city of Moscow will see a continuous price rise and by December prices will have been in the interval between USD 7,500 and 8,500/sq.m.

(4550% up over the year, or 8085% up vs. 2006). In Moscow oblast, they can climb up to Malginov G.N., Sternik G.M. Rynok zhilya//Rossiyskaya ekonomika v 2006 godu. Tendetsii i perspektivy.

(Issue 28). M., IET, 2007, p. 694727.

Sternik G.M., Pechenkina A.V. Chto prosikhodit na rynke zhilya Moskvy. Makroekonomicheskiy podkhod (doklad na Analiticheskoy konferentsii Moskovskoy Assotsiatsii Rieltorov Rynok nedvizhimosti: situatsiya, tendentsii, prognoz 30 Aug 2007). www.realtymarket.ru, Aug. 2007.

Section Institutional Problems USD 4,0005,000/sq.m. (6570% up both over the year and vs. 2006). The dynamic of the first months of 2008 allows one to assume that this scenario is highly probable. For example, in January 2008 alone, housing prices soared at 5% against a fall in the volume of offer of apartments, which is a sign of demand being superior to offer on the market118.

Forecasts for other regions show that the price situation will be advancing according to the same scenario, with the 2008 price increment rates making up: 4045% in Tver, 6070%in Perm, Izhevsk, Rostov-on-Don, Novosibirsk, 8085% in Saint Petersburg, Yaroslavl, Yekaterinburg, and over 100% in Ulyanovsk.

In three years (200709) housing prices will rise: in Moscow oblast, Izhevsk, Moscow, Yaroslavl 1.71.9 times, in Yekaterinburg, Rostov-on-Don, St. Petersburg 2.52.8 times, Perm and Novosibirsk 3.43.5 times, and in Ulyanovsk 3.7 times.

Beyond this time horizon (apparently, after 20102011) when volume of construction and offer of apartments have grown substantially, the forecasts suggest decline in the longterm price rise growth rates.

The forecasted price dynamics will be affected by many groups of factors, some of which boosting the price rise, while other inhibiting it. They can be ganged in two groups: factors external to the housing market (political, macroeconomic, factors of interaction with supplier/consumer markets); and internal factors (progress in implementation of the National Priority Project on Housing, the populations greater housing mobility rate, interaction with supplier/consumer segments of the real estate market (Table 24).

So, the balance of factors highlights a strong increasing trend in the dynamic of offer prices for housing in Russias cities and proves accuracy of the mathematical modeling results.

Overall, the 2007 development of the housing market was characterized by a clear and nearly universal deceleration of the price rise growth rates. Given the impact of macroeconomic factors, there arose a group of cities where real (inflation-adjusted) prices even began to decline.

While fairly successful, the implementation of the national housing project complicated the problem of provision of the national construction complex with resources. As well, the social efficacy of the project can be questioned.

The mortgage loan mechanism, which was viewed as a main vehicle for making housing more affordable for the population, was subject to effects triggered by crisis phenomena in the US economy. Its prospects will be determined by the general situation in Russias economy, including its ability to withstand negative external shocks. Meanwhile, the analysis of development of the market for mortgage sales over recent years showed that it has been to a greater degree determined by the overall situation on the housing market, rather than terms and conditions of a loan disbursement. Even if the overall demand declines, under stable prices and a considerable volume of offer on the market there occurs growth in the volume of mortgage sales and, particularly, in their proportion in the overall volume of sales. Should demand grow, while volume of offer declines and the pace of price rise is high, the growth in the volume and proportion of mortgage sales is down.

Ignatyeva Yu. Moskovskikh okon nedostupny svet. In: Izvestiya, 29 Feb. 2008, p. 1, RUSSIAN ECONOMY IN trends and outlooks Table Balance of Factors That Determine the Medium-Term Price Dynamic for Housing in Impact of factors on prices Catego- Groups ries of of factors factors Upwards Downwards Election campaigns: additional funding of the presiden- Some risk of intensification of tensions in the society during the election tial race, rise in effective demand fueled by fees pay- campaign and because of change of governors in some regions, and formation able to political technologists, media, showbiz of a new federal government Continuation (albeit at a more moderate rate (6-6.5% Decline in the GDP growth rates, which constraints the governments possivs. 8.1% in 2007) of GDP growth, growth in budgetary bilities for tackling socio-economic challenges and holding growth rates of expenditures and the level of the populations real the populations incomes.

disposable incomes. Continuation of growth of the Continuation of the capital outflow for the sake of direct investment.

capital inflow, primarily in the form of corporate bor- Possible decline in the speculative capital inflow as it may be attracted by rowings (the net inflow for the first time became posi- the US and European financial instruments, providing the respective countries tive in 2005 USD 0.1 bn, and it consequently soared have handled the mortgage and housing crisis up to 42.0bn in 2006 and 82.3 bn in 2007).

Further price rise for energy sources (up to USD 200/barrel, according to some forecasts). The process of Russias accession to WTO, as well as low political risks, which encourage capital inflow from overseas companies, banks and funds, particularly due to the possibility for recession in the US, continuation of appreciation of the Rb. and greater inflation rates Fall of the world stock market indices and manifesta- Advancement of Russias stock market, emergence of versatile high-yields tions of a crisis on Russia one, including capital repa- financial instruments, which trigger the capital flow from the real estate triation via mutual funds which contributes to the market to related markets.

channeling of investment flows to the real estate market Continuation of the consumer boom, which reduces the volume of the populaan the respective price rise for real estate tions savings spent on housing purchases.

The growing bad consumer debts and the consequent liquidity problems in the banking sector and deceleration of the pace of growth in the volume of mortgage loans Greater volumes of the government support and mort- Growth in the volume of house building in regions (in 2007 60.4 sq. m.

gage loans, primarily on the market for newly built nationwide, in 2008 not less than 72m sq.m.) and in the volume of offer of housing. housing on the primary market.

Maintenance or even decline of the volume of offer of Deceleration of the growth rates in the volume of mortgage sales and in the housing in Moscow (along with some rise in the volume proportion of mortgage sales in the overall volume of apartment sales due to of its placement in operation from 4.8m sq.m. in 2007 the start of an intense rise in demand and washing-out of offer, as well as up to 5.05.3m sq.m. in 2008) at the expense of some because of a 12% rise in interest rates (while the Agency for Mortgage half of the housing area will be assigned to the munici- Loans is going to raise the volume of refinancing of mortgage loans up to Rb.

pal programs 65 bn in 2008) The inflow of buyers from remote regions to those in The outflow of lower- and medium-income strata from Moscow to the market the Urals, Volga, Center, North-West; from regions of the nearest and medium- distance Moscow oblast hence a lower effecto Moscow and Moscow oblast; from Moscow to the tive demand in Moscow.

less expensive Moscow oblast, which results in a Competitive housing opportunities for the higher-income stratum in St. Pegreater effective demand in Moscow and other regions tersburg and Sochi, cities of the central and southern Europe hence a lower effective demand in Moscow Continuation of the advanced growth of investment in The flow of investment into the market for commercial real estate (trade, the retailing and construction of commercial real estate office facilities, leisure and rehabilitation centers, logistical complex, techobjects, transport and social infrastructure, which noparks, etc. under lower return rates demonstrated by the house building bolsters attractiveness of the housing market sector Political Macroeconomic External factors project Affordable Housing with related markets Development of the national priority Factors of interaction ity Internal factors market Interaction with related The populations segments of the real estate greater housing mobilSection Institutional Problems Meanwhile, the longer-term forecast (for 1015 years) maintains the price rise should be steady (in USD nominal prices) and its annual pace should account for 3035%, with its monthly growth rates fluctuating between 0 and 812%.

5.5. Russias Military Economy and Military Security The development of the RF military economy in 2007 was mainly determined by the economic and political factors typical of the Russian economy as a whole and also by the necessity to carry on a struggle against terrorist bands. At the same time, the military economy was to a certain extent influenced (at least conceptually) by the military-political declarations and unfriendly intentions on the part of NATO and the USA, as well as by the requirements of military and military-technological cooperation.

5. 5. 1. The Socio-Economic Aspects of Military Personnel Policy Among the military-political and socio-economic events which took place in Russia in the year 2007, the following three should be considered the most important:

- firstly, the beginning of transformations within the RF military establishment, reflected in the appointment of an authentically civilian person to the post of RF Minister of Defense, and in a number of far-reaching alterations of both the functions and the style of work of this ministry;

- secondly, the development and adoption of the federal budget, including that of RF military expenditures, for three consecutive years;

- thirdly, the completion of the Federal Target Program (FTP) The switchover of a number of formations and military units to the system of manning by servicemen enlisted for military service under contracts, for the years 20042007.

While the military-economic consequences of the first two events will become clear only in the years to come, the results of the third one are already apparent, and thus can be summarized, starting with a brief reminder of why the FTP was needed, and how it was developed and implemented. In this connection, our analysis cannot be limited to the events of the year 2007 alone.

After the annihilation of the main rebel force in Chechnya and Dagestan in 19992000, the RF Security Council, on 11 August 2000, took the decision that the size of the army should be considerably reduced (in particular, the number of personnel enlisted for military service in the RF Armed Forces under contracts was reduced to 400 thousand), and then, on November, it instructed the Government and the General Staff to initiate the development of a program for the switchover of the military establishment of the State to being manned exclusively by servicemen enlisted for military service under contracts. It was planned that the Program would be ready by the autumn of 2001.

In this instruction, the word exclusively meant a radical approach to simultaneously resolving a number of other military and social problems. But such an approach, quite naturally, required heavy expenditures, at least at the initial stage. The 2001 budget absolutely lacked the necessary funds.

As a matter of fact, the consequences of the 1998 default effectively prevented any rapid and efficient transition to the absolutely voluntary principle of enlistment. Also, it was not safe to reduce the size of the army under conditions when military operations in the North Caucasus were far from being over, and when potential military threats were all too real. In RUSSIAN ECONOMY IN trends and outlooks August 2002, the RF Security Council prepared, and the RF President approved, The Fundamental Principles of the RF State Policy in the Sphere of Force Development for the Period Until the Year 2010. This document stipulated that a special FTP should be developed in 2003 with regard to the transition of the armed forces to the new system of staffing, and that the transition should begin with the military units of permanent readiness and those on continuous alert, and that the draft should be preserved for the period up to one year for the sole purpose of preparing the necessary mobilization resources.

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