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It is the simultaneous expansion of both external and internal market that has been a positive factor of steady economic development in recent years. Whereas the dynamics of external demand was formed under the influence of exceptionally favorable situation at the world markets of fuels and raw materials, the expansion of internal market was defined by cumulative effect of factors of the increase in domestic business activity and the systematic growth of solvent demand of the population against the background of steady growth of incomes in all sectors of economy.

16,14,12,10,8,6,4,2,0,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(estimation) 2001 2002 2003 2004 2005 2006 external demand internal demand gross real product Fig. 2 Growth Rates of Internal and External Demand over 2004-2007, as percentage to the corresponding quarter of the previous year Source: Federal State Statistics Service Analyzing the dynamics of internal demand change in the structure of resources formation should be taken into account. Under existing domestic production growth rates anticipating growth of import supplies volumes is the factor that secures balance of demand and supply at the consumer and investment market. In January-September 2007 the share of import in the structure of retail trade goods resources increased up to 47%, exceeding by 1 p.p. the figure of 2006 and by 4 p.p. the average level of 2003-2004.

During 2007 significant slow-down of foodstuffs production development has been observed, which was accompanied with the decrease in the share of domestically produced goods in foodstuffs retail trade turnover resources. Over January-November 2007 foodstuffs production increased by 6.4% retail trade turnover of foodstuffs growing by 12.3%. The share of import supplies of foodstuffs increased up to 37% against 34.8% in the previous year.

In January-November 2007 the drop of production by 0.5% was observed in textile and sewing production, and growth rates deceleration from 13.7% against 2.0% in leather goods and footwear industry was registered. As a result the share of import supplies of non-food goods increased up to 54.4% against 51.7% a year ago.

The situation is aggravated by the fact that along with ruble appreciation and shift of consumer preferences towards average price segments as to ratio of price and quality Russian producers cannot compete with import. The exception is the companies that with production modernization and reconstruction, construction of fundamentally new marketing and logistic system occupied niches at the market after ruble devaluation in 1998. However the created potential was not enough to sustain steady trend of production growth, labor efficiency and profitability.

In 2007 the ratio of real wages growth rates and labor efficiency has worsened. Whereas in JanuarySeptember 2006 they were 12.9% and 5.3%, correspondingly, in January-September 2007 they were 16.2% and 5.3%.

In the first half of 2007 the share of employees labor remuneration in the GDP was approximately 49.8% and was above the figures of 2004-2006. High differentiation of average wages by kinds of economic activities sustained. In industry the extent of wages differentiation was defined by the deepening of the gap in rates of labor remuneration in extractive and processing industries. Nominal accrued wages in minerals extraction exceeded the average level throughout the economy by 2.1, and in fossil fuels extraction by 2.times. In processing industries wages were equal to 97% of the average throughout the economy and 42% of the figure for extractive industries. Exceeding of the average throughout the economy figure by 2.3 and 2.times, correspondingly, was observed in production of oil products and fossil fuels transportation. In education, health care average wages was equal to 75-77% of the average throughout the economy, in government management and national security - to 120% and in financial activity to 260%. Specific features of labor remuneration by kinds of economic activities influenced considerably the formation of incomes and expenditures, populations consumer demand, employment character, distribution of labor resources in the economy.

Table Structure of GDP Formation by Incomes in 2001-2007, as percentage to the total 1 half year 2004 2005 2006 Gross Domestic Product 100 100 100 Of which:

Employees labor remuneration, including hidden wages 46.0 43.8 44.1 46.0 49. Net taxes for production and import 16.8 19.7 20.0 21.4 19. Gross profit of economy and gross mixed incomes 37.2 36.5 35.9 32.6 31.Source: Federal State Statistics Service In the structure of the employed population only 8% accounts for people not working for wages, that is employers, hiring employees for work at their own enterprises on permanent basis, self-employed workers.

This correspondingly defined the peculiarities of populations incomes formation and the GDP formation.

More than 69% of the incomes account for labor remuneration of employees.

The level and share of labor remuneration of employees in the structure of GDP had primary influence on social indicators, including labor market. Trend for increasing demand for labor force was characteristic for 2001-2007. Shortage of labor resources increasing the number of the unemployed has decreased by 1 mln of people since the beginning of the year and was equal to 4.4 mln of people in October 2007. In 2007 average annual number of the employed in the economy increased by 2.5% as compared with the previous year and was equal to 70.5 mln of people. It should be noted that the change of demand for labor force was defined by the shift of employment towards kinds of activities rendering market services. Formation of this trend at the initial stages of economic growth recovery had a powerful positive influence on life quality and gave stimulus for acceleration of service sector development rates.

However deceleration of industrial growth rates and import acceleration provoked the trend for reduction of average annual industrial production staff. In the last four years reduction in employment was observed in nearly all kinds of economic activity, the number of vacancies reducing most intensively at processing industries. In 2006 as compared with 2004 the number of the employed in the processing industry decreased by 532 thousand of people, in minerals extraction by 52 thousand. Formation of this trend was proceeding along with slackening of the trend for labor efficiency growth in the industry. Whereas in January-September 2006 indices of wages and labor efficiency growth were, correspondingly, 10.6% and 6.5%, in JanuarySeptember 2007 they were 14.7% and 6%. Negative impact of this trend is strengthened by growing shortage of qualified labor force in nearly all kinds of activities. Existing structure and professional indices of demand for labor and its supply are becoming one of the main problems of labor force market operation, employers having to decrease gradually qualitative requirements for specialists. Such a situation leads to slow-down of the industry efficiency growth rates due to irrational use of production factors.

Business Survey in December S. Tsukhlo 2007 is coming to the end leaving us, according to the estimations of enterprises managers, not in high spirits. Continuous slow-down of demand growth decreases satisfaction with its volumes and forces the enterprises to restrict output growth. Forecasts for he beginning of 2008 are also not very rosy and less optimistic than those at the end of 2006.

According to the data of the Federal State Statistics Service in January-November 2007 industrial production in Russia increased by 6.3% as compared with January-November 2006. In November of the current year industrial production increased by 4.7% as compared with November 2006 and decreased by 0.8% as compared with October 2007. According to the Center for Macroeconomic Analysis and Short-term Forecasting upon excluding seasonal and calendar factor average daily output in November increased by 0.9% as compared with October (in October figure being 0.5%). However managers of the enterprises give other estimations of the dynamics of the main indices of the Russian industry.

MONTHLY DYNAMICS OF THE DEMAND IN 2004-(BALANCE=%GROWTH-%DECREASE) % --MONTHS -1 2 3 4 5 6 7 8 9 10 11 First, the comparison of December figures of the previous years indicates that the end of 2007 from is as to demand dynamics worse than the finals of three previous years. Demand for industrial production growth rates upon exclusion of seasonality from survey results remains at the level that is the lowest from March 2006. And as compared with March 2007 when the best result of the current year was observed, it decreased by 4 times. At present only 66% of enterprises consider the demand for their production as normal. In August 2007 this figure reached 72%, which is the absolute maximum for 1992-2007. In December 2007 the lowest satisfaction with the demand was registered in the construction industry (45%, December 2006 54%), machine-building (57%, 2006 - 55%) and foodstuffs production (66%, 2006 -78%).

Second, the dynamics of the output at the end of 2007 does not cheer the producers as well. According to the estimations of enterprises managers output growth in the industry continues to slow down. In December growth rate of the index was the worst for the corresponding months of the last five years. Exclusion of seasonal factor demonstrated the lowest but one result of the year, a worse was observed only in September. At the same time the output dynamics began to correspond better to demand dynamics. Coincidence of changes in production and sales was characteristic for 64% of the enterprises in December (in November for 59%), anticipating changes of output as compared with changes in demand was observed at 23% (29%).

MONTHLY DYNAMICS OF OUTPUT IN 2004-(BALANCE=%GROWTH-%DECREASE) % -MONTHS -1 2 3 4 5 6 7 8 9 10 11 Third, changes in estimations of finished goods stocks does not add optimism taking into account the dynamics of situational indicators. In December the balance of estimations increased up to +14 points, figures being +8 in November and +4 in October. As a result the level of excessive stocks accumulation returned to the level registered by surveys up to the middle of 2006, when there were enough staff and facilities. At the moment there are shortages of the both in the industry. In other words, everything that is capable of producing more or less competitive goods has been put in operation. Nobody is willing to stop the production and put facilities out of service. Under such conditions slow-down of the demand growth forces the enterprises to work for stocks, hoping that in the forthcoming months sales will go up again and stocks accumulations will disappear. Demand forecasts however remain not very comforting and force the enterprises to consider their stocks as excessive, not normal or insufficient. Such a situation will most likely slow down the start of the Russian industry at the beginning of 2008.

Fourth, financial and economic state of the enterprises stopped getting better. In 4 quarter the share of estimations good state reduced down to 8%, whereas it was 19% in the second quarter of 2007, which was the maximum for 1995-2007. At present it is happening due to the increase in responses of satisfactory state, whose share has increased up to 79%, which is also the maximum for 1995-2007. Two quarters in a row the surveys has not registered the growth in the profit in industry. The balance of the changes in this indicator upon excluding seasonality is no more positive, not becoming significantly negative, which would enable to register profit decrease.

ESTIMATIONS OF ENTERPRISES ECONOMIC STATE % SATISFACTORY BAD GOOD AWFUL 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/ Balances of forecasts for changes in demand based on initial data remain negative second month in a row:

there are still more enterprises in the industry that expect decrease of demand for their products. At the end of 2006 the ratio was better. Upon exclusion of seasonality the balance (growth rate) was positive (+17 b.p.), but was the worst figure for the last seven quarters. The forecasts for changes in output also dropped down to minimum values for the last eight quarters (basing both on initial and cleared from seasonality data).

Problems Connected with Entrance to New Geographical Sales Markets Expansion of Sales Geography of Russian Industrial Enterprises As it is demonstrated by IET surveys Russian industrial enterprises have wide geography of their goods sales. Main markets (both in 2005 and 2007) were regions that are situated far from the region of origin (see Table 1) Table Regions of Primary Sale of Goods Produced by Russian Industrial Enterprises, as percentage 2005 In the territory of oblast (krai, republic) where the enterprise is situ42 ated In bordering oblasts of the Russian Federation 31 In other oblasts (krais, republics) of the Russian Federation 60 In CIS countries 35 In European countries In Asia, Africa, America Total 198 Sources: December (2005) and June (2007) IET surveys By far less goods were sold in the territory of the oblast (krai, republic) where the enterprise is situated the fact that is especially true for 2007. At the moment the oblast of location is considered as the main sales region by two times less enterprises than remote (even not bordering) oblasts. It is also notable that over two years the share of enterprises with a main focus on remote regions increased by 10 points, while the figures for other directions of sales changed less. The change nearest in scale (but with the opposite sign) occurred in the local direction of sales only 34% of enterprises consider the oblast of location as main direction for sales (two years ago the figure was 42%).

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