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Table The structure of accounts payable by industrial branches as of the end of October The share of Accounts payable The share of overdue acaccounts payThe share of counts payable of the overdue debts able in the Branches of industry branch in the Total, bln Overdue, in the total, branch in the total debt of roubles bln roubles % total overdue the industry, debt of the % industry, % The Industry, total 2040.1 728.9 35.7% 100.0% 100.0% Including: power industry 234.1 122.9 52.5% 11.5% 16.9% Fuel industry 500.3 143.1 28.6% 24.5% 19.6% Including:

Oil industry 160.4 34.1 21.3% 7.9% 4.7% Oil refining industry 66.4 5.5 8.3% 3.3% 0.8% Gas industry (production and processing of natural 178.2 33.2 18.6% 8.7% 4.6% accompanying gas) Coal industry 93.8 69.1 73.7% 4.6% 9.5% Ferrous metallurgy 114.7 39.9 34.8% 5.6% 5.5% Nonferrous metallurgy 141.3 50.6 35.8% 6.9% 6.9% Chemical and petrochemical industry (without 109.4 46.9 42.9% 5.4% 6.4% pharmaceutical industry) Machine- building and 567.1 201 35.4% 27.8% 27.6% metal processing Timber industry, woodworking, pulp and paper 58.7 25.6 43.6% 2.9% 3.5% industry Construction materials 56.9 25.9 45.5% 2.8% 3.6% industry Glass, china and faience 5.8 2.3 39.7% 0.3% 0.3% industry Light industry 34.4 17.3 50.3% 1.7% 2.4% Food industry 158.7 31.7 20.0% 7.8% 4.3% Including: fish industry 25 6.2 24.8% 1.2% 0.9% Microbiology 3.4 2.2 64.7% 0.2% 0.3% Flour-milling and feed mill 13.9 4.2 30.2% 0.7% 0.6% industry Medical industry 9.6 2.5 26.0% 0.5% 0.3% Printing industry 4.3 0.2 4.7% 0.2% 0.0% Source: The State Statistics Committee, calculations by the authors.

RUSSIAN ECONOMY in trends and outlooks Among branches of the industry the leaders with respect to the share of overdue payments in the total debts are the coal industry (74%), power industry (53%), light industry (50%) and microbiology (65%) (table 3). While the amounts of debts of the last two branches are comparatively small, the power industry and fuel industries taken together represent about one third of total debts in the economy. The largest consumer of commercial credits in absolute expression is the engineering and metal-working industries. Their share of debts is about 30% of the total accounts payable in the economy.

An important part in reducing non-payments (starting since 1998) is played by energy monopolies that have cut all types of non-money payments for delivered and purchased goods and services. Among the basic changes in the pattern of settlements for goods and services delivered by the monopolistic enterprises 7 one shall single out a further ousting of barter transactions by mutual settlement of outstanding accounts. The share of settlements in money in 2002 has increased and was kept at the level of approximately 80% (see fig. 16).

100% in cash 80% by bills of exchange 60% by direct exchange 40% of goods (barter) 20% by offsets 0% other types of settlements Source: The State Statistics Committee, calculations by the authors.

Fig. 16. The pattern of settlements for goods and services delivered by monopolistic enterprises At the same time some of the recent tendencies are alarming. This is connected first of all with the factors of overdue payments growth8. For example in 2002 there was registered a Pursuant to the Decree of the Government of the Russian Federation #10 of January 6, 1998 The State Statistics Committee of the Russian Federation shall perform a permanent statistical monitoring of settlement of accounts of the larges taxpayers in Russia: RFO EES Rossii, OAO Gazprom, OAO Aeroflot Russian International Airlines, organisations in the federal railway transport, as well as industrial monopolistic organisations.

By the results of econometric research the growth of non-payments is connected in particular with the lack of efficiency of domestic producers, decrease in crediting by banks, etc. For more detail see in Razvitiye rossiyskogo finansovogo rynke i novye instruments privlecheniya investitziy by R. Entov, A. Radygin, V. Mau, S.

Sinelnikov-Murylev and others, Moscow, IET, 1998, p. 96-149; in Nepltatezhy v Rossiyskoy Federatzii by O.

01/03/05/07/09/11/01/03/05/07/09/11/01/03/05/07/09/11/INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru stable growth of the share of losing enterprises in the economy (see Fig. 17), which compared to the previous year increased by 7-10% in different branches of the economy. As of October 2002 the share of losing enterprises in industry was 45.3% (38.4 in October 2001), 40.5% in civil construction (36% in October 2001), 46.1 in transport (41.4% in July 2001).

Calculations show9, that ineffectiveness and financial insolvency of enterprises was one of the decisive reasons of non-payments in the economy, which reveals the presence of a channel of financing bad companies. This connection was most typical for the period before 1998. After the crisis the share of ineffective enterprises was constantly decreasing, which also was the case of the statistical significance of this factor. Though no growth of nonpayments is being registered, the risk of it is still present.

Industry Transport Civil construction ---Fig. 17. Changes in the share of losing enterprises in industrial branches (seasonal differences to the corresponding period of the previous year) Overdue arrears of wages starting from 2000 have been stable at the level of 30-40 bln roubles (in current prices, see fig. 18). Their growth since the beginning of 2002 was equal to 2%, which is much lower than the inflation and the real growth of average wages.

Lugovoy, L. Semyonov, IET (with support of USAID), 2000; in Neplatezhi v rossiyskoy economike i regionakh by A. Zolotaryova, L. Liderman, O. Lugovoy, R. Entov, IET_CEPRA, 2001.


01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/05/09/01/RUSSIAN ECONOMY in trends and outlooks Source: The State Statistics Committee, calculations by the authors.

Fig. 18. Changes in overdue payment of wages by enterprisesIn all probability the reasons for the lack of an upsurge of non-payments in spite of the larger number of losing enterprises and the real exchange rate of the rouble11 lie first of all in normalised government finances, increased financing by the banks, positive changes in the sphere of contract legislation (including the law on bankruptcy) and the reverse effect of the multiplier12 used in settling accumulated non-payments.

In future the situation in the sphere of payments will depend upon the progress in the real sector of the economy, as well as upon the views of the authorities, which to a high degree depend upon budget revenues.

Though, as we see it, the major reason for the non-payments crisis in an economy in transition lies in non-market measures, which result in covert financing of ineffective companies. The non-payments economy as opposed to the market one can respond to exogenous shocks not only by making smaller debts, but to a much greater degree by an increment of overdue payments. This form of managing the situation is far from being a market one, as far as competition mechanisms, which are essential for the process of ousting ineffective companies by more successful ones, are being switched off. In contrast to a normal market situation, Given here are overdue payment of wages by enterprises and organisations in industry, civil construction, agriculture, transport, education, health service, culture and arts, science and scientific service, housing and communal services, as well as (starting in August 1998) by organisations in the social security sphere, public authorities in the subjects of Russian Federation and local governments, public order institutions. The given figures are for the end of month.

Statistical assessments of relation between the real exchange rate of the rouble and non-payments are given in IET papers (see notes above). According to the basis hypothesis growth of the real exchange rate of the rouble decreases profitability of domestic production, which promotes bigger arrears caused by ineffective production.

For detail about multiplicative effects of non-payments spreading see in: Lugovoy O. Arrears in a Transition Economy: the Mechanism of Contagion. RECEP, Russian Economic Trends 2002-Q2. . 1930.

bln roubles 12/03/06/09/12/03/06/09/12/03/06/09/12/03/06/09/12/03/06/09/12/03/06/09/12/INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru losing enterprises in the economy of non-payments can survive as long as there is the possibility not to pay persists (enforcement mechanisms dont function).

If the growth of losing enterprises persists also in the future, which is partially promoted by a higher real exchange rate of the rouble, there will be a rather high probability of a stronger upsurge of overdue payments. Taking the positive experience of recent years into consideration, renewal of non-payments crisis in the same scope become less and less probable with each year, but in case of unfavourable tendencies in the economy on the whole one cannot view such a crisis as improbable. Most alarming at that would be non-performance of budget expenses, which can be caused by a bigger number of losing enterprises and a generation of non-payments by the government itself. The last one can provoke non-payments spreading and crisis renewal in the economy.

2.2. Balance of Payments Last year, a certain change was registered as concerns the downward trend demonstrated by the current account balance since the year before last. Thus, since the 1st quarter there has been observed a growth in the balance of payment on current account. While in 2001 this balance declined almost twofold (from US $ 11.5 billion in the 1st quarter to US $ 5.7 billion in the 4th quarter), in 2002 the current account balance increased from US $ 6.billion in the 1st quarter to US $ 9 billion in the 3rd quarter; however in the 4th quarter it decreased to US $ 7.7 billion (according to the preliminary CB RF estimates). As before, the major factor determining the amount of current account balance was the balance of trade, which, in turn, fully depended on the changes in prices of energy resources and other staple Russian exports on world markets. The data presented in Table 1 demonstrate that the relationship between world oil prices and Russian balance of trade, which was noticeable in through 2001, also manifested itself over 200213.

It shall be pointed out that in 1st through 3rd quarters of 2002 the increasing volumes of Russian exports accounted for the growth in the balance of trade. The amounts of import also grew, but at a slower rate. However, in the 4th quarter of 2002 the rates of increase in imports outpaced rates of growth in Russian exports. For instance, the amount of Russian balance of trade in the 4th quarter of 2002, according to the preliminary estimates of the CB RF, made US $ 11.5 billion, at the same time, export of goods increased from US $ 28.8 billion in the 3rd quarter to US $ 29.6 billion, while imports grew from US $ 15.6 billion to US $ 18.1 billion (i.e. by almost 20 per cent).

Alongside with the declining balance of trade, in 2002 the current account balance was significantly affected by the negative values of the balance of nonfactor services - the surplus of imports over exports increased from US $ 460 million in the 1st quarter to US $ 1.6 billion in the 3rd and 4th quarters, what was determined by the growing import of services.

Reviewing the trends of changes in the balance of payments across its components, it may come to notice that in spite of the declining values of the active balance of trade, in Evaluations carried out for 1993 through 2002 detected a statistically significant relationship between the RF trade balance (TB) and the index of world oil prices (P), dummy variable equals 1 in III and IV of 1998 when other factors determined the RF trade balance.

TB = 9,2 + 14,3P + 5,9Dummy (-5,1) (10,0) (3,5) R2=0, RUSSIAN ECONOMY in trends and outlooks the surplus of exports over imports primarily accounted for the growth in forex denominated holdings of residents. In other words, all payments to non-residents, as concerns transactions not related to export and import of goods, as well as changes in foreign assets and liabilities of residents, were financed at the expense of the active balance of trade. It primarily concerns the financing of the negative balance of labor and capital services (payment of non-residents wages and debt servicing), portfolio investment abroad, increase in foreign holdings of Russias residents, as well as payments aimed to diminish Russian residents liabilities to nonresidents.

An analysis of the aggregate indicators of the Russias balance of payments in 2002 reveals that as concerns the balance of assets and liabilities Russian forex denominated holdings increased by US $ 45.3 billion (the balance of trade in January through December of 2002) at the expense of trade transactions between residents and non-residents. Besides, Russian foreign holdings were replenished from such sources as foreign direct investments (US $ 2.6 billion), portfolio investment in non-financial enterprises (US $ 2.2 billion), official guaranteed borrowings (US $ 1.4 billion), as well as loans, deposits, and borrowings on the part of Russian banks and non-financial enterprises (US $ 8 billion).

18000 200% Trade balance Petroleum world price index (I quarter 1995 = 100%, right scale) 180% 160% 140% 120% 10000 100% 80% 60% 40% 20% 0 0% I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 1995 1996 1997 1998 1999 2000 2001 Source: CBR, IMF International Financial Statistics, authors calculations.

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