RUSSIAN ECONOMY IN JANUARY 2011: TENTATIVE DATA AND BASIC TRENDS 2 THE POLITICAL AND ECONOMIC RESULTS OF JANUARY 2011 (S.Zhavoronkov) 5 INFLATION AND CREDIT AND MONETARY POLICY (N.Luksha) 9 FINANCIAL MARKET (N.Burkova, E.Khudko) 13 THE REAL SECTOR OF THE ECONOMY: FACTORS AND TRENDS (O.Izryadnova) 22 RUSSIAN INDUSTRIAL SECTOR IN DECEMBER 2010 (S.Tsukhlo) 26 FOREIGN TRADE (N.Volovik, K.Kharina) 29 STATE BUDGET (E.Fomina) 33 RUSSIAN BANKING SECTOR (S.Borisov) 40 MORTGAGE IN RF (G.Zadonsky) 43 ON THE CONCEPT OF SUSTAINED DEVELOPMENT OF RURAL TERRITORIES (R.Yanbykh) 45 INNOVATION RUSSIA – 2020: WHITHER EFFICIENCY (I.Dezhina) 49 THE ROLE OF FREE TRADE AGREEMENTS IN RUSSIA’S CURRENT FOREIGN TRADE POLICY 52 (A.Pakhomov, K.Muradov) THE NEW PRIVATIZATION POLICY TWIST (Yu.Simachev) 58 EU EXPERIENCE IN MUTUAL ASSISTANCE IN THE RECOVERY OF TAX CLAIMS (E.Velikova) 62 INTERNATIONAL TAX COMPETITION AS AN INNOVATION DEVELOPMENT FACTOR (A.Levashenko) 65 INFORMATION RELEASED BY THE RF PENSION FUND (RF PF) (I.Tolmacheva) 71 AN OVERVIEW OF THE RF GOVERNMENT’S MEETINGS IN DECEMBER 2010 (M.Goldin) 72 A REVIEW OF REGULATORY DOCUMENTS ON TAXATION FOR DECEMBER 2010 – JANUARY 2011 74 (L.Anisimova) CHANGES IN THE NORMATIVE BASE OF THE BUDGETARY PROCESS (M.Goldin) 78 RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES RUSSIAN ECONOMY IN JANUARY 2011:
TENTATIVE DATA AND BASIC TRENDS Social and Political Background: Business under government cover The main developments of the socio-political background in January 2011, became a major terrorist attack at the “Domodedovo” airport, the announcement of the BP transaction with Rosneft, a visit of a representative delegation of Russian government officials to the Davos Forum, held against the background of the Western world reaction to the second sentence to Michael Khodorkovsky, as well as Vladimir Putin’s order to start the development of a new program of government actions.
Terrorist attack in Domodedovo is the second major terrorist attack in Moscow in the past months, which has carried away 36 lives and held on a specially protected transport facility - most acutely raises the issue of the effectiveness of intelligence and law enforcement services. Meanwhile, President Medvedev has tried to bring out from under the fire of criticism the Ministry of Internal Affairs and FSB, having laid much of the blame for the attack on the airport staff. This has provoked suspicions that the attack will be used for redistribution of property, in particular - to implement the plan for consolidating Moscow airports within a single company.
The transaction on exchange of BP shares with “Rosneft” has become a major image success of the Russian national oil company, which was under the threat of lawsuits on the part of the former owners and investors of “YUKOS”. However, the deal is clearly an insufficient step in the realization of the goals of “Rosneft” to be transformed into a global energy company, the actual economic effect of the transaction looks limited, and joint plans of offshore development are uncertain. At the Russian part of the Davos Forum the delegation of senior Russian officials was absolutely prevailing, which in itself demonstrated the vector of the political economy of Russia: the role of government in the Russian economy and business is conceived as a leading and decisive. Instead of plans to improve the investment climate, it was openly announced that an exclusive course of protection of investments carried out under the auspices of government institutions. President Medvedev announced the creation of a sovereign fund, through which foreign companies can invest in the Russian economy (in the infrastructure objects above all) on principles of parity with the government.
Finally, in January, Prime Minister Vladimir Putin instructed to develop a new program of the government’s actions over the medium term. He therefore, above all, emphasized his role as a man who is truly deliberative and controlling the country’s development strategy, and indirectly confirmed the assumption of a firm intention to return to Kremlin. Despite the fact that the program development is entrusted to economic centers with a liberal reputation (ANE and HSE), it is clear that their credentials will be fairly limited and are unlikely to be extended to address the most pressing institutional problems in the field of law enforcement, judicial system and corruption combating.
Macroeconomics and Finance: on the oil wings In January, oil prices again rose for the first time since the crisis and have exceeded USD 100 per barrel (for the last time oil prices were at that level in February 2008). Therefore, the rise in prices is continued for six consecutive months and reached about 30% growth as compared with summer prices. This circumstance affected the main trends of macroeconomic dynamics in late 2010 and early 2011: improvement of the trade balance, stabilization of the dynamics of foreign currency and gold reserves and RUR strengthening.
After the failure in August, the trade surplus at the end of the year consistently exceeded the indicator of 10 billion dollars. After stagnating in November, in December the growth in imports, according to the FCS tentative assessments (for foreign countries), was accelerated again to 11% as compared with the previous month. However, rising oil prices compensate for this acceleration.
Reserves of the Central Bank in January, for the first time since the second half of October 2010, have ceased to decline. On January 21 they amounted to 482 billion against 476 billion on December RUSSIAN ECONOMY IN JANUARY 24. We would like to remind, that from the third week of October until December 24 the reserves have decreased by 27.6 billion (5.5%). Throughout this period, an intense outflow of capital was recorded in Russia, which exceeded 38 billion dollars for the year. Moreover, three quarters of this outflow occurred in September - December 2010.
In December 2010 the RUR real effective exchange rate rose by 3.7%. As a result of 2010, the ruble strengthening in real terms in the two-currency basket has reached 7.1%, as compared with the weakening in 2009 to 3.9%. In January, this trend was continued. The value of the two-currency basket in January continued to decrease: on January 25, it amounted to 34.67 rubles. (-0.7% as compared with the end of December).
As expected, the trend towards higher inflation acceleration has spilled over to the new year.
However, the rate of inflation in January - 102.4% - was higher than even the pessimistic forecasts of Ministry of Economic Development (2,1-2,3%). The largest contribution to the rise in prices was made by seasonal factors - increases in tariffs for water supply and heating, common to the beginning of the year, and the rising prices for fruit and vegetables. Contribution to the jump in prices has been also made by increased excise taxes for gasoline from January 1, 2011. As a result, the official forecast of annual inflation (at 7.6%) in 2011 ceased to play any role. Inflation risks will remain high during the first half of 2011.
Against this background, the Bank of Russia has still left at the same level the interest rates on operations to provide liquidity, but increased the deposit rates and reserve requirements. However, such tightening of monetary policy is not enough to slow down inflation, which, according to our estimates, in 2011 may well be higher than in 2010, while the Bank of Russia opts for the purposes of stimulating the economy, but if prices growth in February remain high enough, it will have to adjust its policy.
In December, the excessive reserves of commercial banks increased significantly: as per the month result, they have reached RUR 2.2168 bn, which is 1.4 times more than in November. The growth of reserves was caused primarily by more than fourfold increase in bank deposits with the Bank of Russia, as well as more than 1.5 -fold growth of banks’ correspondent accounts with the Central Bank.
Such dynamics is explained by a seasonal increase in budgetary expenditure at the end of the year.
Real Sector On January 31, Rosstat has disclosed the estimates as of GDP growth rate in 2010, which amounted to 4%. Such assessment indicates a significant acceleration of economic growth in late 2010. Basing on previous quarterly growth (I quarter – 3.1% versus the same period of 2009, in II quarter – 5.2%, in III quarter – 2.7%), the growth in the IV quarter should reach at least 5% of the IV quarter of previous year. Moreover, the economy should grow relative to the previous quarter at a rate significantly higher than the rate typical for the whole recovery period (from III quarter 2009).
It looks amazing when you consider that, according to Federal State Statistics Service, the pace of growth in major industries in the IV quarter were significantly lower than in the most successful quarter II. Thus, the volume of industrial production increased in the IV quarter by 6.5%, against 10.9% in the II quarter, production grew by 2% in the IV quarter against 4.8% in the II quarter, manufacturing activity - by 9.9% versus 16.3%, transport freight turnover - by 2.4% against 13%.
Trade turnover has also showed a slowdown in the IV quarter (4.1% versus 5.3% in the II quarter and 5.9% in the quarter III ). Among the clearly positive trends of the year end, it should be noted a significant acceleration in investment growth in fixed assets (up to 12.8% in the IV quarter against 7.2% in the previous quarter and negative growth in the early years), as well as increase the amount of work in the construction of 5 6%. Thus, we can say that construction is the last area in which the economy has recovered from recession and demonstrates the positive (and accelerating) growth for two consecutive quarters. However, investment and construction are usually delayed in its dynamics in relation to other areas of the economy.
Another disturbing trend in 2010 was the actual restoration of import share in cash resources of retail trade. In 2007-2008 the proportion was 47% in 2009, at the background of the crisis, fell to the level of 39-41%, but in the III quarter of 2010 reached the pre-crisis value. This indicates that the recovery resource in domestic demand that could have a significant impact on the growth of domestic production, is close to exhaustion.
RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES The Rosstat index of business confidence demonstrated in January 2011 a positive trend, which, however, was regarded by the Rosstat as seasonal factor (normal for January increased optimism of manufacturers). Business surveys of the Gaidar Institute demonstrated a sustained situation typical of recent months: the relative satisfaction with the present situation and the considerable uncertainty in the future. Purified from seasonal demand growth in December, showed growth, with the satisfaction of demand remained the same. Purified from seasonal factors, the dynamics of the actual demonstrate the output index for the next crisis peak. Against this background, the companies refuse from the plans to reduce staff. However, a more subtle indicator of the forecast shows the continued pessimism in the evaluation of the future. The negative balance of answers regarding the stock of finished products shows that the company definitely does not want to replenish their stocks of finished products per new customer and prefer to have it made production much less than usual for the month volume.
The surveys demonstrate that companies transferred to the tactics of raising product prices in the last months of the last year, do not intend to abandon it. The industry is planning significant price growth during the first months of the new year, probably even to the detriment of sales. But it seems, that increasing tax burden does not leave any other choice to the companies. Such a drastic revision of the price plans were not in the Russian industry since September 1998.
THE POLITICALAND ECONOMIC RESULTS OF JUNUARY THE POLITICAL AND ECONOMIC RESULTS OF JANUARY S.Zhavoronkov In the very end of December last year, it came to knowledge that the court of law sentenced M.
Khodorkovsky and P. Levedev to 14 years of imprisonment on a charge of stealing crude oil from their own company YUKOS, i.e. from themselves. The prosecution requested this sentence, and so publicly had wished PM V. Putin before the sentence was pronounced. It became clear that the rules of the game under which authorities can send an entrepreneur behind bars on arbitrary charges would remain unchanged. Despite a great number of his public addresses, the expert community became far less attentive to the incumbent president, even more so as Mr. Medvedev publicly admitted he might not run in 2012 (while earlier he voiced equivocal formulations about a possibility for him to run for presidency). Rosneft and BP announced a swap whose prospects are yet to be confirmed, as AAR consortium filed a lawsuit in London against the alliance. The Act ‘On Police’ was finally passed. The Act comprises just a handful of novelties vis-а-vis the previous Act, and en route was stripped of just its most notorious provisions. Russia saw a huge terrorist attack in Domodedovo airport – yet another proof of the existing terror threat.
The passing of a sentence on the second criminal case of M. Khodorkovsly and P. Lebedev on December 2010 made headlines in January 2011. This second criminal case was opened against the executives/owners of YUKOS back in 2005, right at the moment the first trial was coming to an end. In 2009, Messrs. Khodorkovsky and Lebedev were convoyed back to Moscow to stand the second trial. Mr. Khodorkovsky believes there have been political and corruption motives behind his second case. On 27 December 2010 the district court of law found Messrs. Lhodorkovsky and P. Lebedev guilty to part. 3 Art. 160 (embezzlement) and part 3 Art. 174 (money legalization (laundering) of the Criminal Code of RF and sentenced them to 14 years in general regime penal colony, inclusive of the term of the first sentence (they had been behind bars since 2003) – thus precisely matching the prosecution’s request.
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