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In accordance with the Federal Targeted Investment Program by the specified list of the Ministry for Trade and Economic Development of the Russian Federation it was envisaged to allocate funds for construction sights and objects in 2007. It was designed to put into commission 3696 objects, of which was actually put into commission, including 913 at full capacity and 128 partially. Besides, 100 objects (40 at full capacity and 60 - partially) from those intended to be put in commission in the following years.

By 1 January 2008 4043 objects were fully financed. At the same time the level of financing of 1668 was below 50% and 1497 objects were not financed. Technical readiness of 51.0%-99.9% was registered for 1509 objects or 24.7%.

Table Objects Envisaged by the Targeted Investment Program Put in commission in JanuaryNumber of objects for 20071) October 20072) Including At full capac- partially total those with the ity date for putting in commission in Total 6093 3696 953 including:

Construction complex 3 3 - - Transportation complex 1003 512 188 Agriculture complex 1142 967 292 Special complex 269 180 18 Social complex 3307 1785 394 Other objects 369 249 61 1) including conduction of design and survey works, equipment purchase that is not included in constructions estimates 2) number of construction sights and objects, put into commission according to the established procedure Source: Federal State Statistics Service Delays in financing of some FTPs in 2007 were caused by late approval of a number of FTPs that were adopted during the year. The traditional delay in financing of the FTIP at the beginning of the year, low executive discipline, and absence of firm control over the use of funds are the main factors contributing in the of systematic growth of a number of unfinished construction, the number of new construction sights and objects increasing every year.

According to amendments made to the Budget Code this situation should change in 2008. it is envisaged that no FTP be considered unless it is approved a month before the project is submitted to the State Duma in other words all FTPs should be approved by 26 July. During next two years the procedure for the formation of the list of construction sights and objects financed from the federal budget that is approved by FTIP will be changed. Just one mentioning of the object in FTP or in the decree of the Government will be enough to make a decision on its financing over the whole period of construction. In such a case there will be no need in annual approval of the expenditures for each object and the discipline of FTP financing will be increased.

Business Survey S. Tsukhlo First data on industrial dynamic in February are not very optimistic. A slight increase in demand growth rates only returned the indicator value to the level of 4th quarter 2007. At the same time industrial growth continued to slow down. One more reason for that is attack of the import that started in the environment of continuous ruble appreciation and inflation expectation growth. It should be noted, however, that the enterprises are quite optimistic and expect intensive growth of demand and output in the forthcoming months.

According to the data of the Federal State Statistics Service, which are supported so far by the Center for Macroeconomic Analysis and Short-Term Forecasting, the industrial production growth has slowed down at the beginning of the year. As compared with December, in January average daily output upon exclusion of seasonal and calendar factors demonstrated the increase of only 0.3% (against 0.6% on average over the last quarter of 2007). Peculiarities of national holidays, however, and the weather, which was not as warm as a year ago, make the experts treat with cautiousness January figures and wait for February results. First data on February dynamics of the Russian industry are not very optimistic.

CHANGES IN SOLVENT DEMAND, SEASONAL FACTORS 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/Fig. On the one hand, the intensity of solvent demand has increased (though slightly). Upon exclusion of seasonal factor demand growth rates were equal to +8 points (2 p.p. better than in January, last years figure was +15 points), exclusion of occasional fluctuations demonstrated +7 points (growth of 1 p.p., the figure was +17 points a year ago). As compared with 4th quarter 2007 the intensity of demand growth has virtually not changed. Such a dynamic of sales growth cannot satisfy the enterprises any more. As a result, dissatisfaction with the demand went up to 33% in the Russian industry, which is the worst (maximum) figure for last 18 months. The share of such enterprises in the light industry was equal to 71%, in machine-building to 39%, in construction 36%.

DYNAMICS OF THE MAIN ESTIMATIONS OF SOLVENT DEMAND % BELOW THE NORM NORMAL 1/94 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/Fig. In February output growth rates upon exclusion of seasonality were a few points lower than January figures and two times lower than last February. Output will not or cannot follow the demand, or rather forestall them. Whereas in 2006-2007 the share of enterprises for which demand changed faster than output was equal on average to 11%, in the first two months this figure rose to 16%. At the same time the share of enterprises with the inverse ratio (output changes faster than demand) decreased down to 19%, which is the absolute average year minimum for 1993-2008. In other words the enterprises cannot produce more goods than it is possible to sell as they used to do even in the environment of low as compared with the first half of demand growth rates. Such situation led to decrease of industry stocks of finished goods. The balance of estimations (above-below the norm) has again decreased down to +4 points. At the same time the proportion of enterprises with normal stocks is now equal only to63%, whereas a year ago this figure reached the level of 67%. The industry has to sell goods from stocks, and it is becoming more and more difficult to fulfill them.

THE BALANCE OF ESTIMATIONS OF FINISHED GOODS STOCKS % (BALANCE = %ABOVE -- %BELOW THE NORM NORMAL BALANCE OF ESTIMASTIONS --1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/Fig. The situation for Russian manufacturers is also complicated by the increase of competing import restraining effect. According to the enterprises estimations in 1 quarter 2008 competition with import makes the Russian enterprises reduce the output and give place to competitors from non-CIS countries more often than internal Russian competition to domestic Russian competitors. Balance of negative influence of competition with import on output is two times as bad as internal Russian competition (20 p.p. against 8 p.p.).

Forecasts for changes in demand and output reached absolute record-breaking levels in February. Such an intensive growth of sales and demand has not been registered in 1993-2008yet. The growth of optimism was observed in all branches of industry. In many sectors maximum levels for the branch were registered. Plans for changes in price have become a bit more moderate than in January but they remain above February levels.

Industrys Competitive Capacity: instruments and Obstacles In the environment of import pressure that has been intensifying raise of competitive capacity of produced goods becomes not a stock motto but an absolute necessity. The results of long-term IET monitoring demonstrate what steps have been taken by the Russian producers in this field (see table 1).

Table Extent To Which Measures to Increase Competitive Capacity of Goods Have Spread in the Russian Industry, 19962008, as percentage to the number of those responded 1996 1997 1998 1999 2000 2002 2004 2006 Study of consumers demands 71 65 63 57 60 56 54 45 Decrease of costs 67 68 67 63 56 70 66 58 Advertising campaign 36 40 31 37 33 39 35 38 Observation of competitors 41 38 35 36 38 37 33 39 Improvement of produced goods 57 61 60 59 63 79 72 82 quality Projecting and output of new goods 24 58 57 65 57 60 56 61 Equipment modernization 25 19 22 25 39 41 46 New equipment purchase 21 16 23 31 39 38 44 Source: IET surveys 1996Over the whole period of monitoring enterprises in general paid the biggest attention to the increase of the quality of the goods produced, which is quite logical. It is true that before the default this measure held only the third place, giving way to such actions as costs decrease and study of consumers demand. But beginning with 1999 the problem of goods quality becomes a leader, at least in the opinion of respondents, and reaches the extent to which it is spread at 82% of enterprises (in 2008 at 80%). As a result the enterprises consider the problem of the quality of the goods produced is not the main problem of its competitiveness (see table2).

Table Factors That Decrease Competitive Capacity of Russian Enterprises Goods, 20062007, as percentage of the number of those responded 2006 Obsolete equipment 48 Insufficient qualification of employers 27 Low quality of raw materials and components 23 Absence of new goods (technologies) 22 Overrated ruble exchange rate against dollar 12 Low quality of goods produced as compared with the RUSSIAN analogues 3 Low quality of goods produced as compared with the IMPORTED analogues 13 High prices for energy supply 39 High transportation costs 31 High final costs 30 Source: IET surveys in 2006Decrease of costs had sunk to 5th place and is used in the environment of increasing inflation expectations at 49% of enterprises. The figure is however not small but minimum for this factor. The decrease of costs as a factor of competitive capacity was applied in Russian industry in 2002. Study of consumers demands has also been losing its popularity: whereas in 1996 this measure was the most popular (71%). In 2006 it held 5th place with the degree of spread of 45%. In the environment of growing demand and restricted supply it is less important for enterprises to know consumers demands thoroughly.

It is equipment purchase that holds (or to be more precise has shot ahead to) the second place. Whereas in 1998 this factor was used or at least was considered necessary to use in struggle for competitive capacity only 16% of the enterprises, at present the figure is 54%. The increase is remarkable but not sufficient. Obsolete equipment remains, in the opinion of enterprises, the biggest obstacle for competitive capacity growth of the goods produced (see table 2). In 2007 there wee 57% of enterprises that had such opinion, whereas in 2006 48%. The situation is aggravated by absolute shortage of facilities in the Russian industry that evolved in 2007 and became more acute in 2008. The main former source of facilities augmentation - that is the launch of those off-stream - has obviously been exhausted. Moreover those that were launched before generally are to be replaced since they were made as a rule in the USSR. That is why modernization of the equipment is becoming more and more wide-spread measure to increase the competitive ability in the Russian industry. In 1998 it was cited by 19% of enterprises, whereas in 2008 by 48%.

Innovation way of competitive capacity growth by creation and production of new goods is becoming less popular in the Russian industry. Only 51% of enterprises cited it in 2008, whereas in 2006 was 61%. Only in 1996 this factor was cited more often (24%).

Foreign Trade N. Volovik The main indices of Russian foreign trade continued to grow in December 2007. This was favored by auspicious situation at the world market as well as by the growth of the internal demand. By the end of the year however a number of serious problems connected with the fulfillment of a number of contracts for export supplies of civil and defense equipment had evolved. They may result in the loss of a number of traditional foreign markets for the Russian machine-building.

As usual at the end of the year, indices of export and import reached their peak levels in December 2007.

Russias foreign trade turnover, calculated ion the basis of balance-of-payment methodology, was equal to RUR 63.7 bln in December 2007, exceeding the figures of December 2006 by USD 63.7 bln.

Figure Main Indices of the Russian Foreign Trade as USD billions 2000 2001 2002 2003 2004 2005 2006 Balance Export Import Source: Central Bank of the Russian Federation In December high export growth rates that were characteristic for the whole 4th quarter 2007 sustained. In December 2007 export reached USD 38.71 bln, which is by 30.6% higher than the corresponding figure of 2006. It should be noted that export to CIS countries increased more rapidly than the export to non-CIS countries by 36.5% and was equal to USD 5.75 bln. Export to non-CIS countries was equal to USD 32.bln, which is by 29.5% more than a year before.

Increase of Russian export growth rates at the end of the year was accounted for by the improvement of the price situation at the world markets. According to the data of the Central bank of the Russian Federation the prices of the Russian exporters were on average higher than in 2006, energy goods being by 11% more expensive and non-energy goods by 6%. Throughout 2007 prices for oil at the world market were mainly growing after some decrease in the second half of 2006- beginning of 2007 (price for Russian oil in the middle of January 2007 reduced down to USD 46.6 per barrel). By the end of the year prices for oil had doubled and reached the level of USD 97 per barrel.

In December 2007 as compared with November 2007 average price for the oil grade Brent increased by 1.9% being USD 90.64 per barrel. As compared with December 2006 the price went up by 43.63%. The price for oil grade Urals reached the level of USD 88.1 per barrel in December 2007.

The prices for oil growing the Government of the Russian Federation established record-breaking export duty rate for crude oil at the level of USD 275.4 per ton from 1 December 2007.

On average prices for oil products were higher in 2007 than in 2006. In December 2007 petrol was by 43.47% more expensive than in December 2006.

Prices for non-ferrous metals in December 2007 decreased as compared with the previous month because of demand reduction. Aluminum dropped in price by 5.05% as compared with the previous month, copper by 5.5%, nickel by 15.05%.

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