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2004 2005 2006 2007 2004 2005 2006 index of monetary volume index of physical volume export import Fig.1. Change in the Indices of Export and Import Growth by Monetary and Physical Volumes over January-September 2004-2007 as percentage to the corresponding period of the previous year Comparison of the dynamics of foreign trade activity by components demonstrates that along with ruble appreciation the gradual formation of the trend for anticipating growth of import compared to export concerning both physical and monetary volume. Increase in import is observed for nearly all goods items; machinery, equipment and transport vehicles export growing at faster rates. In the first half of 2007 investments in import equipment purchase were equal to 18.6% of the total volume of investments in machinery, equipment and transport vehicles. In the structure of retail trade resources the share of import expanded to 47%, including growth for foodstuffs up to 37% as compared with 34.8% last year and for non-food goods up to 54.4% against 51.7%.

Other circumstances being equal the dynamic growth of import favored creation of competitive environment, high share of import in retail trade turnover had negative influence on the formation of resources balance the external economic situation changing.

Under existing structure of foodstuffs trade resources formation the dependence on the changes in the situation at the world markets o food is becoming stronger. In the second half of 2007 sharp increase in demand and the level of world prices for grain-crops, dairy and some other foodstuffs had negative effect on the dynamics of internal consumer market. Against the background of dynamically growing prices at the world markets reduction of import supplies has changed the situation at consumer market. This was especially true for dairy trade group the share of which in domestic market supply is in the range 18-40%.

The situation has been aggravated by slow-down in output growth rates of foodstuffs of social importance.

Over January-October the production of dairy increased by 0.8% against 2.5% in the corresponding period of the previous year, of butter by 2.1% against 6.3%, fat cheese by 1.6% against 5.9%. Reduction in output of non-fat dairy in terms of milk volume was equal to 14.4% against 1.4% in January-October 2006.

Increase in oil production by 20.7% and in flour-and-cereals production by 1.2% in January-October this year was changed to decrease by 0.9% and 1.3%, correspondingly.

Sharp increase in prices for foodstuffs was accounted for by structural factors. Analysis of retail trade resources formation demonstrates that in 2005-2007 the trend for the increase in import supplies of both food and non-foods goods. In 2 quarter 2007 the volume of import supplies was equal to 38% in trade resources of foodstuffs market, exceeding by 1 p.p. the figure of the previous year, in 2 quarter to 36% (+3 p.p.) and in 3 quarter to 37% (+4 p.p.).

It was by the growth of prices for both import and domestic goods that the domestic market reacted to the change in demand and supply proportions and to the change in world prices for foodstuffs. Raw materials becoming more expensive the prices of foodstuffs producers has gone up by 15.7% since the beginning of the year as compared with 6.5% in January-October 2006, the main jump in prices taking place in JulyOctober of the current year.

Traditional seasonal decrease/slow-down in foodstuffs prices growth rates in autumn that had been observed since 2004 in 3 quarter of the current year was replaced by increase in prices by 1.8%. In October increase in prices at foodstuffs market reached the maximum over the last three years level and was equal to 3.3%, exceeding the level of prices of February 2006 by 0.3 p.p.

As a result over September-October 2007 prices for foodstuffs increased by 4.3% and since the beginning of the year by 11.6%, exceeding the level of January-October 2006 by 4.9 p.p. it was the prices for milk and dairy (by 22.7%), for butter (by 31.9%) and for oil (by 47.9%) that have been rising at highest rates.

It should be noted that steps to restrict prices for foodstuffs growth undertaken in September did not have a considerable influence on the situation in October. In October prices for sunflower-seed oil increased by 26.3%, for rennet cheese - by 23.9%, for eggs by 20.9%. Milk became 11.2-13.1% more expensive, cultured milk foods, curd of different fat content by 9.6-10.7%. As a result of shift in demand towards cheaper goods, prices for them started growing at high rates. Growth rates of prices for grain processing (flour, bread and bakery) prices for semolina, millet, peas, beans and ground rice went up by 3.4-4.1%.

Alcoholic beverages 8,6,-1,Granulated sugar 24,0,Fruit and vegetable products 3,3,47,-1,Sun-flower seed oil 2,31,Butter 4,5,22,Dairy 5,6,6,Fish and seafood 6,11,6,Meat and poultry 4,18,17,Pasta 3,19,Cereal and beans 0,21,Bread and bakery 2,-10 0 10 20 30 40 50 2005 2006 Fig.2. Increase in Prices for Some Categories and Kinds of Foodstuffs over January-October 2005-2007, as percentage to December of the previous year As a result growth rates of prices for foodstuffs has increased from 6.7% in January-October 2006 to 11.6% in 2007. Because of the fact that acceleration of inflation rates over the last two months is caused by anticipating growth of prices for main kinds of food of social importance the population with low incomes is influenced more heavily by the inflation accumulated from the beginning of the year.

Measures to keep the prices down can be effective in short term. The solution of fundamental problems of balance at the foodstuffs market in compliance with the program of the Ministry for Trade and Economic Development envisages the application of such measures as decrease of import customs duties for some kinds of goods (oils, for instance), increase of export duty rates for grain-crops. Development of regulatory and legal measures aimed at the growth of production and supply of agriculture products, monopolism decrease and development of competition in the field of production output and sale. However first results of the declared system of measures fulfillment will be seen only in the first half of 2008.

The factor that partially compensates the growth of prices for foodstuffs is comparatively low dynamics of prices for non-food goods, high quality goods and services. Over January-October 2007 growth rates of prices for non-food goods remained at nearly the same level as a year ago 4.9% as compared with 5%, tariffs for paid services rendered to population has increased by 11.7% since the beginning of the year. According to the IET forecast the expected growth of consumer prices as a result of the year can be in the range of 111,2% - 111,8%.

It should be noted that the change in the price proportions has not affected the consumer market as a whole yet. The increase in the retail trade turnover over January-October 2007 was equal to 14.8%, and of the volume of paid services rendered to the population to 7.0%. Consumer boom was sustained by acceleration of real population income growth rates and continuous expansion of consumer crediting. Over January-October 2007 the increase in populations real incomes was equal to 12.6% as compared with 10.4% in the corresponding period of the previous year and of real wages to 15.6% against 13.2%. In 3 quarter the share of labor remuneration in the structure of populations incomes was equal to 69.1% exceeding by 2.5 p.p. the figure of the previous year. Against the background of growing populations incomes the trend for reducing inclination for savings has been becoming more evident in the current year. Over JanuarySeptember 2007 the share of savings in populations incomes decreased by 2.8 p.p. and was equal to 7.3%.

The dynamics of population savings requires thorough examination in the environment of inflation acceleration, changes in the situation at the real estate market and continually emerging problem of banks liquidity.

Business Survey in November S.Tsukhlo First data on the dynamics of the main indicators of Russian industry in November can cast doubt on the hopes of industry growth acceleration. Continuous slow-down of demand growth decreases the satisfaction of enterprises with sales volumes and forces to reserve output growth. Rise in excessive finished goods stocks and insufficient attention paid to the demand dynamics may compel them to slow-down production even further.

According to the estimations of the Ministry for Economic Development and Trade, in October Russian economy overcame the trend for industry growth slow-down. By data of the Federal State Statistics Service, in October 2007 as compared with October 2006 industrial production increased by 6.1%, and as compared with September 2007 - by 7.4%. Upon exclusion of seasonal and calendar factors the growth of the output in the industry as regards to September, according to the calculations of the Center for Macroeconomic Analysis and Short-Term Forecasting, was equal to 0.4%. Ministry for Economic Development and Trade counts on acceleration of industrial production growth rates in last three months of 2007 and does not intend to reconsider the year forecast of industrial production growth that is at the level of 7.4%. The first data on the dynamics of the main indices of the industry are not so optimistic as Ministrys forecasts.

First, growth of solvent demand for industrial production continues to decelerate. In November balance (growth rate) for initial data is equal only to +1 balance point, exclusion of seasonal factor increases its value up to +5, exclusion of occasional fluctuations as well gives 6 b.p. However not only are all the data obtained worse than October and September results, they have been the worst since the beginning of 2006. Demand is not for the Ministry of Economic Development and Trade.

CHANGES IN SOLVENT DEMAND, UPON EXCLUSION OF SEASONALITY (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/ Second, satisfaction with sales remains at its lowest for the last nine months level in the industry. Only 68% of enterprises consider the volume of demand as normal. Dissatisfaction with the demand in industry increased up to 29%. In machine-building the volume of sales is unsatisfactory for 35% of the factories (in August there being only 22% of such factories), in light industry for 43% (in April 28%), in foodstuffs production for 25% (in July 13%).

Third, deceleration of demand growth still forces the enterprises to reserve output growth. In November balance (growth rates) of the initial data demonstrated growth slow-down +20 down to +14 b.p. Exclusion of seasonality showed the rate of +20 b.p. (after +23 b.p. in October), exclusion of occasional fluctuations as well gave +21 b.p. (after +20 in October). These data give enough grounds to conclude that output growth rates in November 2007 slowed down.

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/Fourth, the demand requires considerable corrections for output volume to be made since in November the output dynamics lost connection with the demand dynamics. Simultaneous changes in production and demand was registered for only 59% of the enterprises in November. There has not been such a low figure for two years. The share of enterprises at which output exceeds demand in contrast increased up to 28%. This is the maximum figure for the last five months. The share of the enterprises at which output is behind the demand also increased up to 13%. As a result in November 41% of enterprises had the dynamics of output different from the dynamics of demand. The producers obviously failed to take into account demand as the main guiding line for their output.

BALANCE OF ESTIMATIONS OF FINISHED GOODS % STOCKS (BALANCE = %ABOVE-- %BELOW THE NORM NORMAL BALANCE OF ESTIMATIONS --1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/Fifth, the balance of estimations of finished goods stocks increased considerably. Over the month the figure went up by 5 points and became the worst for the last seventeen months. To put it in another way there has not been such an excess of the stocks accumulation since July 2006. This is also a signal of inadequate response of the output dynamics to the current demand. There were more goods produced than it was possible to sell and the excess went to stocks. As a result there were more goods in stock than there was usually in the last months. Under normal conditions the stocks are replenished if demand growth is expected in the forthcoming months, which enterprise cannot satisfy without overload of the production. However expected demand does not give grounds for replenishing stocks so that they can be extensively used in forthcoming months.

Forecasts for demand changes have clearly been decreasing since the beginning of the second half of the current year. In November (with forthcoming New year holidays) the balance of initial data became negative: enterprises expect not the slow-down of demand growth but absolute decrease in the demand. A year ago the forecasts were more optimistic: in November 2006 balance was just zero and had not become negative by the end of 2006. In 2007 zero level was past already in October and in November the forecasts became negative. However, exclusion of seasonality demonstrated the possibility of demand growth rates slow-down only by 1-2 points down to +17 b.p. Enterprises production plans after falling by 5 points in October recovered previous (however not very high) figures for expected growth.

Competitive Markets in the Russian Industry As it is demonstrated by the IET surveys over the period of competitiveness monitoring in 1995-2007 the maximum for competitive markets with domestic competition was registered in Russian industry in 2005.

Then 94% of the enterprises felt some competition from other Russian producers at their markets (see ! .). The biggest share of markets with competition from non-CIS countries producers fell on 2006 and was equal to 73%.

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