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In 2004, in consumers sector a slow down of rates of growth in prices was ob served. In 2004, the producer price index in light industry amounted to 108.1%, as against 115.2% in 2003, while in food industry, to 111.4%, as against 114.8%. Smooth dynamics of growth in prices on consumer foods could be explained by changes in a market situation and decrease in popularity of domestic goods in a situation of appreciation of the RUR and growth in demand in import goods (Table 7).

Table Producer price indexes by the branch of industry in the 19992004 period (December to December of the previous year, %) 1999 2000 2001 2002 2003 Industry total 167.3 131.6 110.7 117.1 113.1 128.Electric power industry 114.4 139.9 130.2 127.3 113.9 111.Fuel industry 234.9 155.2 102.2 124.3 101.4 164.Oil industry 249.2 158.0 97.1 125.6 101.6 165. Petroleum refining industry 342.3 147.5 84.5 119.9 114.8 148.Natural gas industry 122.1 163.1 141.5 130.2 77.1 188.Coal industry 132.2 144.3 122.4 109.1 110.1 151.Ferrous industry 189.2 129.2 103.5 123.3 128.8 165.Non ferrous industry 215.8 108.7 89.4 130.1 127.2 113.Chemical industry 143.8 126.8 119.8 108.3 115.1 129. Petrochemical industry 166.5 135.8 101.2 108.7 111.3 117.Engineering industry 149.6 128.0 116.5 110.6 111.2 115.Wood industry, woodworking industry 167.7 124.6 107.7 108.2 107.9 111.and pulp and paper industry Building materials industry 137.3 136.6 119.5 117.4 117.0 116.Light industry 156.0 122.3 110.9 105.3 115.2 108.Food industry 162.6 118.6 115.0 105.8 114.8 111.Source: the Federal Service of State Statistics.

Export Oriented Branches of Industry Both the extent of demand in primary goods and allocation of income from foreign economic activities are of principal importance to Russian economy. Analysis of post crisis development of Russian economy suggests that a slow down of industrial growth (106.1%, as against 107.3% in 2003 and 111.0% in 2000) is caused by slowing rates of development of the primary sector. In formation by fuel and primary industries of nearly 40 % of balance financial result of the economy and 75% of that of industry, both income of eco nomic agents and the situation on the domestic market depended on fluctuations in inter national markets. Fuel and primary industries produced over 40% of industrial output, used 60% of investments in fixed capital of industry and ensured employment of 20% of industrial personnel. In the 20002004 period, the share of added value received from ex port of primary goods amounted to nearly 20% of the GDP and 40% of output of goods.

Such limitations of primary resources production as were related to the condition of the export infrastructure, decrease in reserve capacities and depletion of competitive ad vantages (which appeared as a result of the 1998 RUR devaluation) started to affect devel RUSSIAN ECONOMY in trends and outlooks opment of the primary sector. With the existing structure of capital funds, further increase in capacity utilization would result in capital intensity of production and decrease in effi ciency of utilization of labor and financial resources. A low rate of processing in metallurgy and chemical and wood sectors prevented successful diversification of the structure of production and export. Due to the above factor, the structure of industrial production and changes in demand on the domestic market depended to a great extent on dynamics of output volumes of the export oriented sector.

In the 20032004 period, non ferrous metallurgy lost its dominating influence on growth dynamics of the metallurgical sector. In 2004, in non ferrous industry an increase in output amounted to 3.6%, as against 6.2% in 2003. Change in the volume of demand in principal export commodities resulted in a slow down of growth rates of non ferrous in dustry. According to the results of the three quarters of 2004, growth in export volumes was registered only in respect of unprocessed aluminum. At the same time, in a situation of favorable dynamics of prices on non ferrous metals manufacturers aimed their efforts at preserving stability on a traditionally volatile and cyclic market of non ferrous metals, rather than expanding the supply.

With growth rates at the level of 105.0%, ferrous metallurgy occupied leading posi tions in the sector as a result of simultaneous growth both in domestic and foreign de mand. With increase in investment activities in national economy, there was growth both in demand in engineering materials and their sales volumes on the domestic market. A favor able change in a business climate and global market situation gave an additional impetus to growth in ferrous metallurgy. Export of ferrous metals increased by 76.6% on the Janu ary November 2003 figure, while that of ferrous based alloys, by 24.4%. According to the results of three quarters of 2004, balance profit in ferrous metallurgy increased by 130%.

In the past two years, specifics of ferrous metallurgy were determined by dynamic growth in investment in fixed capital. Though higher rates of renewal of production facilities and removal from service of obsolete equipment resulted in a slow down of rates of output as compared to 2003, they predetermined future development of ferrous industry.

The Oil and Gas Sector The oil and gas sector forms a basic sector of Russias economy and plays a leading role in forming the federal budget revenues and the nations active balance of payments. In 2004, the oil and gas sector has found itself under the impact of the price situation on the world market for oil. As over 70% of the domestic oil output is exported in the form of crude or refined oil, while domestic sale prices are substantially lower than international, the world price levels form the main factor that determines the national oil sectors proceeds and financial state. Due to high growth rates of the world economy, OPECs efforts1 to limit oil production and the fall in Iraqi oil output, the oil prices have been extremely high in 2004. As well, the prices remained high because of the fall in oil output in the Mexico Bay due to a hurricane in September, the unrest in the delta of the Niger, and strikes that had hit the oil sector in Nigeria, Brazil and Norway. As a result, in October 2004 Brent oil hit the level of USD 49.6/barrel, while Russian Urals sky rocketed up to 42.3 USD/barrel. In 2004, the prices for the OPECs oil basket has been considerably above the ceiling of the tar geted price range of the Organization (USD 22 28/barrel) and made up USD 36.05/barrel on average. The price for Russian Urals on the world 9European) market in 2004 reached on average USD 34.45/barrel, or up by 27.4% vis a vis its respective level in 2003 (Table 8).

According to the decision made by the 2003 (September) OPEC conference, since November 1, 2003 the quota of oil out put was reduced by 900,000 barrels a day (from 25.4 to 24.5 mln. barrels), while the February and March 2004 conferences ruled that since April 1, 2004 the quota should be reduced by another 1 mln. barrels a day (to 23.5 mln. barrels).

Section 3.

The real sector At the end of 2004 the prices slid slightly, which can be explained by the rise in the OPEC countries oil output2, restoration of the volume of oil output in the Mexico Bay and the growth in oil supplies from the NIS.

Table World Oil Prices in 19972004 (USD/barr.) 1997 1998 1999 2000 2001 Brent, UK 19.12 12.72 17.97 28.50 24.44 25.Urals, Russia 18.33 11.83 17.30 26.63 22.97 23.OPECs oil basket 18.68 12.28 17.47 27.60 23.12 24.Table 8 (contd) 2003 2004 2004 2004 Ist Q. Iind Q. IIIrd Q. Ivth Q.

Brent, UK 28.83 31.95 35.36 41.54 44.00 38.Urals, Russia 27.04 28.94 32.54 37.41 38.92 34.OPECs oil basket 28.13 30.80 34.41 38.97 40.01 36.Source: OECD International Energy Agency, OPEC.

In 2004, the oil and gas sector has seen the trend to a further rise in production of oil, oil products and natural gas that had emerged between 200003. In 2004, the oil output, including gas condensate, nearly reached the 1991 level and accounted for 458.8 t. In 2004, the increment in the volume of oil output grew by 8.9% vs. 2003, while the increment in the volume of primary oil refining grew by 2.6%. So, over the past 5 years, i.e. between 2000 through 2004, Russias oil output rose by 50.4%. In a longer retrospective, the dy namics of Russian oil output in 2004 was at 19.4% lower the pre crisis maximum of 1987, when the volume of oil output accounted for 569.4 mln.t., while it appeared to be at 52% greater vs. the 1996 minimum level when it was 301.3 mln.t. Interestingly, the output in the oil sector was growing against some decrease in investment activity. While in 2004 the vol ume of operational oil drilling was close to the prior years level (the increment was 0.4%), the placement of new oil wells in operation slid by 1.1%, while prospecting drilling dropped by 18.3 (which can be explained by a fairly high sufficiency of the existing reserves). In the oil refining sector, the production of petroleum derivatives with the use of intensive tech nologies grew by 1.8%, while the intensity of oil refining grew from 70.3% in 2003 up to 71.5% in 2004. The share of high octane gasoline in the overall output of automobile gas grew from 53.1% in 2003 to 55.3% in 2004. The rise in the output of natural gas which had started in 2002 made up 1.6% in 2004. (Table 9).

The list of the biggest oil producers in 2004 included YUKOS, LUKOIL, TNK BP, and Surgutneftegas. The late 2004 saw substantial changes in the structure of the oil sector:

more specifically, YUKOS main oil asset Yganskneftegas, with its 50 mln.t. plus output was sold at an auction and acquired by Rosneft. Consequently, the latter considerably rose its share in the Russian oil market (from 4.7 up to 16%), while YUKOS share fell dras tically (from 18.7 to 7.4%). So, the proportion of the state owned companies (Rosneft, in cluding Yuganskneftegas, and Gasprom in the national oil output grew up to 18.6%. By contrast, as long as a companys individual oil production is concerned, Tatneft and Bash neft that operate old oil deposits demonstrated the minimum growth rates, which resulted in their shrinking shares in the market.

According to decision made by the June (2004) OPEC conference, since July 1, 2004 the quota was increased up to 25.mln. barrels a day and consequently to 26.0 mln. barrels a day. The September (2004) conference increased the quota up to 27,0 mln. barrels a day, i.e. by another 1 mln. barrels, effective as of November 1, 2004.

RUSSIAN ECONOMY in trends and outlooks Table The Output of Oil, Oil Products and Natural Gas in 2000(as % vs. the Prior Year) 2000 2001 2002 2003 Oil, including gas condensate 106.0 107.7 109.0 111.0 108.Oil 105.9 107.7 108.7 111.1 108.Gas condensate 103.8 106.7 112.8 108.7 116.Primary oil refining 102.7 103.2 103.3 102.7 102.Automobile gas 103.6 100.6 104.9 101.2 103.Diesel fuel 104.9 102.0 104.7 102.0 102.Black oil 98.3 104.2 107.1 100.3 97.Natural gas, cub.m. bln 98.5 99.2 101.9 103.4 101.Oil gas, cub.m. bln 102.5 105.0 110.5 119.3 106.Source: the Federal State Statistics Service Gasprom traditionally dominated over the gas sector. In 2004, according to the RF Ministry of Fuel and Energy, its share in gas production accounted for 85.9%. Russian oil companies showed high growth rates of their gas production, but their overall share in this sector has remained fairly small. The greatest volumes of gas production among oil com panies were reported by Surgutnetegas, Rosneft and TNK BP.

Table The Structure of Oil and Gas Output in 2004* The share in the The share in the Gas output, as Oil, mln.t. total output, as total output, as % cub.m. bln.

% Russia, total 458.81 100.0 633.95 100.LUKOIL 84.07 18.3 5.02 0.Rosneft + 73.39 16.0 10.80 1.Yuganskneftegas TNK BP 70.26 15.3 8.00 1.Including:

49.49 10.8 5.86 0.Tymenskaya OC SIDANCO 20.77 4.5 2.14 0.Surgutnetegas 59.62 13.0 14.31 2.Sibneft 33.9855.99 7.412.2 1.952.87 0.30.YUKOS 33.89 7.4 2.01 0.Yuganskneftegas Tatneft 25.10 5.5 0.74 0.Slavneft 22.01 4.8 0.92 0.Bashneft 12.07 2.6 0.36 0.Gasprom 11.96 2.6 544.42 85.Russneft 6.60 1.4 0.77 0.Other producers 25.86 5.6 44.65 7.For reference:

YUKOS, including 85.68 18.7 3.43 0.Yuganskneftegas Yuganskneftegas 51.79 11.3 1.42 0.Rosneft 21.60 4.7 9.38 1.Gasprom + Rosneft 33.56 7.3 553.80 87.Gasprom + Rosneft + 85.35 18.6 555.22 87.Yuganskneftegas * By the organizational structure of the sector as of December 31, 2004.

Source: The RF Ministry of Fuel and Energy, authors calculations.

Section 3.

The real sector The companies operating on the production sharing agreement basis produced 2.mln. t. of oil, or just meager 0.5% of Russias total oil output, while 150 other minor pro ducers share accounts for just 5.1% (Table 10). The 2004 list of the biggest producers of oil products is overtopped by LUKOIL, followed by YUKOS and TNK BP. As concerns other companies, Surgutnetegas and Sibneft clearly dominate the market for oil products.

In 2004, the domestic prices for oil and oil products have grown drastically, which to a great extent was related to the expanding oil export opportunities. Thanks to high world oil prices, even very costly export transportation arrangements with the use of railroad transport have become efficient. In December 2004, the domestic average price for oil (producer price) in USD equivalent hit USD123.5/t., while the average price for petrol ex ceeded USD 350/t in November 2004, thus breaking an ever record price level for oil and petrol over the post reform period. However, there still existed a considerable gap be tween the domestic and world prices for oil: in 2004 the respective correlation did not ex ceed 40 50%. In December 2004, there emerged the trend to decrease in the domestic prices for oil products (the prices of oil refineries slid by 5.5% on average vs. the prior month). By contrast, in 2004 the gas prices, for the first time ever, exceeded the pre devaluation level and reached USD 105/ 1,000 cub.m. by the end of the year (Table 11).

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