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Focus of producers on modernization and reconstruction of production caused growth of demand for machinery and equipment in nearly all kinds of economic activity. The development rates of domestic machinebuilding and fixed assets reproduction being reserved, the influence of import supplies at the domestic market increased. Factors that had positive effect on the change of technological and assortment structure of investments in the fixed assets were, first, import machinery and equipment becoming cheaper as a result of ruble real appreciation, second, application of zero customs rated for import equipment and, third, implication of industrial assemblage regime, the duties for import components being reduced.

Taking these steps stimulated acceleration of machinery and equipment import growth rates. In JanuarySeptember 2007 investments in fixed assets growing by 21.2%, production of machinery and equipment by 20.9%, transport vehicles and equipment - by 15.7% and electric equipment - by 14.8%, machinery and equipment import increased by 1.56 times. The share of investments for import equipment purchase in the total volume of investments in machinery, equipment and transport vehicles over January-September was equal to 18.9%.

Earnings in the economy growing, the share of budget funds in the sources of financing of investments in the fixed assets went up. In January-September 2007 investments in the fixed assets of RUR 542.7 bln were financed at the expense of budget funds, which comprised 18.5% of the total volume of investments in the fixed assets throughout the economy as a whole, of which at the expense of federal budget 6.3%.

Characteristic feature of 2005-2007 was the change in the ratio of funds of federal budget and the budgets of subjects of the Federation that is directed towards the investments. Anticipating growth of investments in the fixed assets at the expense of the federal budget funds had a considerable impact on investment process.

The share of budget funds used for investments in the fixed assets was equal to 3.23% of the GDP in 2006, including from the federal budget funds to 1.18% of the GDP. In January-September 2007 as compared with the corresponding period of the previous year the increase in the share of budget investments in the GDP is observed by 0.7 p.p.

During January-October 2007 the volume of funds envisaged for construction sights and objects of the Federal Targeted Investment Program (FTIP)was reconsidered three times and as a result government in vestments in FTIP fulfillment increased by 42.6% or by RUR 156.2 bln in 2007 in fixed prices as compared with 2006. The share of expenditures for FTIP financing is expected to be at the level of 1.71% of the GDP in 2007, exceeding by 0.34 p.p. the level of the previous year.

Table , - 2004-2007. % 2006 Investments in the fixed assets total 100 100 100 of which by sources of financing:

Own funds 47.4 47.5 45.1 42. of which:

Profit 17.0 20.1 19.9 19.Borrowed funds 52.6 52.5 54.9 57. of which:

Bank credits 7.7 6.5 9.3 10. Of which of foreign banks 1.4 1.1 1.8 1. Funds borrowed from other organizations 7.3 7.9 5.6 6. Budget funds from: 16.9 18.7 17.3 18. Federal budget 4.9 6.0 5.8 6. Budgets of the subjects of the Russian Federation and local budgets 11.2 11.8 10.7 11.Investments from abroad in the total amount of the investments in the fixed assets 5.4 5.3 7.3 4.* not including small business enterprises and parameters of informal business Source: Federal State Statistics Service In 2007 the number of Federal Target Programs and subprograms financed from the federal budget has decreased considerably, which allowed concentrating resources on the priority directions of social and economic development of the country.

Limit of government investments for 2007 was RUR 544.0 bln. According to program part financing at the sum of RUR 312.8 RUR is envisaged, which comprises 59.7% of the total limit, and according to nonprogram part at the sum of RUR 211.4 bln or 40.3% of the investment limit for the year. The volume of governmental defense order according to program and non-program part of FTIP was equal to RUR 95.9 bln or 18.3% of the total limit.

Table Use of Investment at the Expense of All the Sources for Financing the Objects Envisaged by the Federal Targeted Investment Program1), in January-October 2007, as RUR billion Limit of governmental investments in Investments used at Financed from the expense of all the federal Including sources of financing budget from the fed total eral budget Total 544.0 394.4 254.9 213.including:

Construction complex 0.4 0.4 0.2 0.Transport complex 247.4 147.6 132.8 101.Agriculture complex 10.4 9.6 6.0 4.Special complex 44.3 29.5 9.9 11.Social complex 217.0 189.1 95.2 87.Other objects 24.5 18.3 10.8 8.1). Not including investments, allocated from the federal budget for equipment purchase and conducting design and engineering work for construction sights and objects included in the Federal Targeted Investment Program for and which are kept on books of government clients (builders) that supervise these investments.

Source: Federal State Statistics Service In January-October 2007 the level of financing of the annual limit of government investments in construction sights and objects of FTIP (not taking into account construction sights and objects, envisaged by the government defense order), which the Federal State Statistics Service monitors, comprised 54.2% of the year limit. Investments in the transport and production complex are financed above the average level, the level of financing of defense and social complex is far below the average level.

46,Social complex 43,37,Defense complex 22,47,Agriculture complex 57,68,Transport complex 53,41,Construction complex 53,54,Total 46,0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,Financed - as percentage to the year limit Used - as percentage of the total volume of funds financed Source: Federal State Statistics Service Fig. 1 Level of Financing of Government Investments Use over January-October 2007, as percentage According to the Federal Targeted Investment Program by the specified list of the Ministry for Economic Development and Trade of the Russian Federation government investments for construction of 5976 construction sights, objects, of which 3714 objects were intended to be put in operation, were to be allocated in 2007. In January-October 2007 1413 construction sights and objects were fully financed. At the same time the level of financing of 843 objects is still less than 50%. By 1 November 2007 1607 objects or 26.9% were technically ready by 51.0%-99.9%. In January-October, according to the data of the Federal State Statistics Service, 223 objects were put into operation, of which 170 fully and 53 partially.

Table Objects, Envisaged by Targeted Investment Program Put in operation in JanuNumber of objects for 20071) ary-October 20072) including with fully partially total the deadline of putting in operation in Total 5976 3714 170 of which:

Construction complex 3 3 - - Transport complex 982 546 32 Agriculture complex 1204 1030 24 Defense complex 265 176 - Social complex 3165 1716 90 Other objects 357 243 24 1) including conduction of engineering works and purchase of equipment that is not envisaged by construction calculations 2) number of construction sights and objects put in operation according to the procedure established Source: Federal State Statistics Service Traditional delay with FTIP financing at the beginning of the year, low execution discipline and absence of strict control over the use of funds are the main factors of systematical growth of unfinished construction against the background of annual increase of the number of new construction sights and objects.

In accordance with the amendments made to Budget Code this situation should change dramatically in 2008. It is envisaged that no FTP will be financed if it is not approved a month before submission of the project to the State Duma, that is all FTP should be approved by 26 July. In the next two years the procedure of the list of construction sights and objects formation financed from the federal budget that is approved in FTIP will be changed. It will be enough to list the object in FTP or in the decree of the Government and this will be decision for the whole period of construction. Under such a procedure there will be no need to approve expenditures for each object every year.

Fundamentally new feature of economic growth in 2004-2007 was the shift from financing the investments in the fixed assets from the enterprises and organizations own funds to the expansion of borrowed funds participation. This was a bright example of qualitative changes in the investment process that are directed towards rationalizing of investment flows. As a result of January-September 2007 the share of borrowed funds in the structure of investment financing sources increased up to 57.2%, which exceeds by 2.p.p. the figure of the corresponding period of the previous year.

In January-September 2007 the share of banks in crediting of investments increased up to 10.2% against 9.2% in 2006 and 6.5% in 2005 in the structure of investment sources. The trend for the increase in insurance and investment companies, industrial and trade enterprises as well as foreign capital participation in investment process financing sustained.

Attention should be paid for special features of foreign banks participation in investment activity financing. Since 2000 the increase of the share of foreign investments has been observed and growth of foreign banks participation in financing investments in fixed assets has been registered in Russian economy. However in January-September 2007 investments in the fixed assets from abroad were equal to 4.8% of the total volume of investments, having decreased by 3.5 p.p. as compared with the corresponding period of the previous yea, and the share of foreign banks credits decreased down to 1.1% against 1.8%. In JanuarySeptember 2007 absolute reduction in the volume of funds used from abroad for investments in the fixed assets by USD 1.2 bln as compared with January-September 2006 was observed. In the structure of use of funds coming from abroad in the form of foreign investments it is the increase of share of expenditures for shares purchase and bank credits and loans repayment up to 28.7% against 9.5% in January-September that was of primary importance.

Formation of these proportions took place against the background of intensive growth of net capital import and foreign investments. Over January-September 2007 net import of private capital was, according to the preliminary estimation by the Central Bank of the Russian Federation, equal to USD 56.8 bln against USD 26.3 bln in 2006, and the volume of foreign investments to USD 87.9 bln against USD 35.3 bln.

Change in the structure of investments by kinds of economic activities in January-September 2007 was defined by trends formed in the previous year.

In 2006-2007 the trend for investments in fixed assets in trade and transportation as well as in kinds of activities oriented to rendering of social service education, health care sustained. Characteristic feature of investment process in transportation in 2007 was the change in investment structure by kinds of economic activities. In 2006 the reduction in scale of investments in railway transport and communication the areas for which the period of recovery growth of 1995-2005 was characterized by high investment activities was observed, against the background of rates acceleration and growth of share of pipeline transport in investment expenditures up to 39.9% of the total volume of investment in transport. In the period of JanuarySeptember 2007 the reduction in investment scale in pipeline transportation was the factor for slowdown of investment rated in the development of transport as whole.

Against the background of steady growing demand for trade services in 2006-2007, redistribution of investments by kinds of activities was observed material and technical base of retail trade and motor vehicles trade, increase in investments in which was equal to 22.3% and 31.8%, correspondingly, to the level of 2006.

Characteristic feature of structural shifts in goods production in 2006-2007 was overcoming of the trade of investments in minerals extraction reduction, which was observed since 2002. As a result of 2006 the increase in investments in fossil fuels extraction was equal to 25.1% against the drop of 2.6% last year. Over January-September 2007 the increase of in vestments in minerals extraction was 19,5%, including in fossil fuels extraction - 19.1% investments in processing production increasing by 10.9%. In electricity, gas and water production and distribution increase of investments in January-September 2007 reached 29.3% and was accounted for by the increase in investment activity in electricity production and transmission by 1.times, dynamics of investments in production and distribution of gas fuel being negative.

The share of processing industries in the structure of investments in the fixed assets on the whole throughout the economy was equal to 16.7% in January-September 2007 as compared with 17.5% in the previous year. Concentration of profits in the export-oriented industries being traditionally high and interindustry capital transfer being weakly developed, it could hardly be expected that acceleration of investment rates be steady and nature of fixed assets reproduction be changed fundamentally. Analysis of dynamics and structure of investments demonstrates that low share of investments in machine-building is characteristic for Russian economy. The share of enterprises producing investment goods was 2.3% in 2007 against 2.7% in 2002. Under existing age, technological and reproduction structure of fixed assets low rates of investments in machine-building production was the factor that restricted rates development of enterprises of production of finished and intermediate goods. Under existing structure of domestic production of investment goods import remains one of the main resources of fixed assets reproduction, production reconstruction and modernization.

Table Structure of Investments in Fixed Assets by Kinds of Economic Activity in January-September 2004-2007, as percentage to the total 2006 2004 100 Total 100 of which by kinds of economic activities:

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