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The real sector Table Main Assessments of Volumes of Effective Demand in 2004 Across Sectors (as % to the Number of Responded Enterprises, the Averaged Annual Data) Difference between Industry branches Normal Below Norm assessments Fuel 83 14 Ferrous metallurgy 71 23 Non ferrous metallurgy 76 24 Chemicals and petrochemicals 65 33 Machine engineering 45 53 Forestry 62 36 Construction 47 50 Light 39 57 Food processing 59 38 In the fuel and metallurgical sectors enterprises reached the highest level of satisfac tion with effective demand, primarily, thanks to export in the condition of an extremely fa vorable sate of affairs on the world markets. The sector for chemicals and petrochemicals likewise has demonstrated successful performance in 2004, however, it succeeded in be coming in the black only in mid 2003, while the forestry and food processing industries had demonstrated positive results yet in 2002.

Speaking of enterprises of different property forms, it was joint stock companies that proved to be most successful in their adjustment to market conditions in 2004. While in the prior years both public enterprises and JSC=s mostly shared the below norm assess ments (albeit, the latter enjoyed a bit better correlation), last year JSC=s managed to quit the red zone they mostly assessed demand as normal (Fig.25), with the difference between the assessments changing over the year form5 to + 12 p.p., while public com panies over the period in question managed only to decrease the lack of their adjustment to market conditions from 13 to 9 p.p. Most public enterprises (54%) are still dissatisfied with the demand for their output. This indicator peaked its maximum in 19961997, when not less than 90% of public companies on average considered the demand for their output insufficient. Post default, the public segment of the industrial sector succeeded in loosing over 30 p.pof its non adjustment to market, but it failed to come into the red, i.e. to en sure the prevalence of the normal answers. In the worst for JSC=s 1996, their dissatis faction with demand likewise accounted for more than 90%, but post default, this segment of the sector decreased its dissatisfaction with demand (alias market) at 46 p.p., with just 43% of JSC=s currently considering the demand for their produce below norm.

Computations of the dynamics of enterprises of different size adjusting to Russian market realities displayed the existence of specific paths and non coinciding final (by 2004) results (Fig. 26). In mid 1990s, while assessing demand, enterprises of all sizes mostly opted for the below norm response. It was large enterprises that suffered to a far greater extent than the others from the lack of effective demand. In early 1996 through early 1997 and prior to the default the level of adjustment to market of ll enterprises was minimum. N the aftermath of the crisis, with the growth in demand, the share of enter prises satisfied with the demand for their produce began to grow, too, albeit gradually and following different paths.

RUSSIAN ECONOMY in trends and outlooks JSC % --- Public --1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 25. The Difference between main Assessments of Effective Demand by Property Forms (normal below norm) The large enterprises satisfaction with effective demand was growing at a pace faster than that of medium size companies and much faster than that of small businesses.

In 2001, with the demand growth rates decelerating, enterprises of all sizes sensed the slowdown of their adjustment to market. In 2003, the process was back on track and in July, for the first time ever, the group of big enterprises reported positive values in this re gard. They were maintaining the excess of the normal assessments (with a sole excep tion) through late 2004. Interestingly, the excess was growing and reached its historical maximum in October 2004 +38 p.p.).At the time, 68% of large enterprises were content with effective demand for their output the results the other groups so far have failed to beat.

Medium size companies managed to reach just the 5052% of satisfaction with deand. It happened in August to October 2003. In 2004, their adjustment rate has never been in the black, with a prevalence, albeit an insignificant one, of the below norm re plies. The enterprises with up to 500 employees find themselves in a far more unfavorable position. The small (by Russian standards) producers have so far failed to reach an excess of positive assessmsnts of demand. The best result was registered in October 2003 and accounted for 10 p.p. At the time 43% of the enterprises assessed the demand for ther output as normal vs. 53% of the below norm assessments. In 2004 the adjustment rate to demand in this particular group grew by 3 p. vs. 2003 (from 26 to 23 p.p.), while in the group of medium size companies by 4 p. (from 13 to 9 p.p.) and in the group of large companies by 21 p. (from 2 up to +19 p.p.). In our view, the most probable cause for such differences in satisfaction with demand is a low competitiveness of the national econ omy in the segment of large enterprises.

Section 3.

The real sector % Over 2000 employees ---1-500 employees -501-2000 employees -1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/Fig. 26. The Difference between Main Assessments of Effective Demand By Enterprises Sizes (normal below norm) Results of computations with the use of a binary logistical regression that describes the correlation between the dichotomic variable (the assessment of demand by a two level scale normal below norm) and enterprises generic features in 200004 proved the preced ing conclusions. The effect of an enterprise size has been steadily positive and always sig nificant: with the number of employees growing, the probability of having the normal as sessments grows. The public property form has almost always decreased the probability of reaching normal volumes of demand. The only exception became 2002, when our surveys registered both an absolute decline in demand volumes and a drop in satisfaction with it. At the time, negative trends were likely to batter to a greater extent privatized enterprises vs.

The others. Attaining normal volumes of demand has always posed a problem for electric companies. This is evidenced by coefficients that have always been negative, great by mod ule and almost always appeared significant. The analogous situation is noted both in the ma chine engineering, construction materials and light industries. By contrast, coefficients of the variable the survey number that depicts the dynamics have always been positive and statis tically significant, i.e. the probability of formation of the normal assessments was growing through all the years in question and particularly in 2003. However, the values of the Nagelk erke Pseudo R Square (proportion of the explained dispersion) appear relatively small, which testifies to the fact that generic features do not appear major ones, as long as the explanation of satisfaction with demand is concerned.

Once the variables that assess the level of domestic competition and the one with overseas rivals was introduced to the model, it was found that competition did not exert a substantial influence on the formation of normal assessments of demand in the national industrial sector. The respective coefficients appeared positive, which speaks in favor of our hypothesis on a low competition level enabling enterprises easier (simpler, faster) at taining acceptable volumes of demand.

RUSSIAN ECONOMY in trends and outlooks The introduction of independent variables, which assess an actual change in main indicators of a given enterprise, to the model allowed to ensure a fundamental increase in the Nagelkerke Pseudo R Square. The regression equilibrium employed assessments of an actual change in output, employment, demand, finished produce in stock, costs and profit. A given sectors features, size and property form of an enterprise and the survey number were kept in the equilibrium, while assessments of competition were excluded from it. The signs of coefficients of a new model appeared quite correspondent to an intu itional idea of the impact the employed variables have on the probability of formation of a normal satisfaction with demand at a given enterprise. It was only the 2003 and 2004 re gressions that have been assessed, as the data on actual changes in employment and profit had been collected only since 2003.

As expected, the actual changes in demand had the strongest impact on the forma tion of satisfaction with demand. With the demand growing, there exists an increasingly greater probability of the normal assessment. It has always been followed by the level of influence by the actual change in employment, i.e. the national industrial sector considers the rise in the number of employees at a given enterprise to be the second critical eco nomic indicator that determines the normality of its position on the market. By contrast, the change in output does not have a substantial impact on the formation of normal assess ments of demand. We believe, this particular result may have more than positive interpretation, for it means that domestic enterprises are no longer in favor of focusing on once very popular purely volume based indicators (gross output). The impact of profit ob viously appeared inferior to the influence employment exercises on the formation of satis factory assessments of demand. The former is substantial and positive, i.e. with the profit rising, the probability of satisfaction with demand grows, too. The satisfaction with demand grows against the fall in the volume of finished produce in stock. This also appears logical, for a fall in the finished goods in stock means that a given enterprise receives spontaneous (not planned) orders that were satisfied by means of shipping the stored stock. The impact of price changes on the formation of satisfactory assessments of demand is contradictory.

In 2003, the probability of satisfactory assessments of demand appeared positively corre lated with changes in prices (with account of the specificity of the coding of responses), i.e. the possibility for a given enterprise to raise its sale prices resulted in a rise in normal assessments of demand. This correlation was substantial. In 2004, the correlation vector changed and its lost its substantiality.

At the next step of the analysis the regression equilibrium was complemented by as sessments of the enterprises current state the assessment of finished produce in stock, capacity loading rate, the assessment of excessive (insufficient) capacities and employment, the assessment of the enterprises economic state. The insertion method that accounts all the variables was replaced by the reverse selection method that step by step excludes from a given model the variables that display a non substantial correlation with a given dependable variable without a substantial loss of the quality of adjustment of the model As a result, we received the 2003 and 2004 models that comprised only the variables that had a substantial effect on the formation of satisfactory assessments of demand.

The formation of demand assessments found itself under the strongest impact of the dynamics of sales, assessments of an enterprise s economic state and those of finished products in stock vs. other factors. All these factors are associated with demand, in one way or another, which is why their effect on assessments of its volume appears quite logi cal. Let us note that the dynamics of finished products in stock does not affect the demand assessments, which evidences that Russian enterprises are developing quite market ap proach to management of their reserves, with their assessments associated with demand, Section 3.

The real sector rather than the volume of the reserves. The dynamics of output likewise does not affect the demand assessments, which should also be recognized as a positive development, as well as small values of production capacities loading rates an increase in the use of produc tion equipment has a positive effect on satisfaction with demand, but appears inferior to the other factors. The absence of excessive capacities due to an envisaged demand ap pears of a far greater importance to the enterprise. The effect of these assessments on satisfaction with demand is greater than the effect form the dynamics of profit. The ab sence of an excessive staff was important, so long as satisfaction with demand is con cerned, in 2003 and lost in significance in 2004, when the industrial sector has already nearly got rid of the excessive workforce and began to increasingly sense its shortage. As usual, an enterprises size has a positive effect on the probability of the unfolding of normal assessments of demand.

3.2.2. Constraints to the industrial growth in While the 2004 dynamics of demand bore both positive and negative trends, but overall its impact on the national domestic enterprises was positive (for the time the pro portion of enterprises satisfied with demand was over that of dissatisfied with it), the dy namics of output were rather negative. Particularly between May through December (Fig. 27). In the first months of the year, the balance of change in output (less seasonality and other random factors) by changing from 21 to 23 balance points, demonstrated stabil ity, rather than growth. The balance consequently fell to 14 points between June to De cember, which formed the worst value since early 2003. A long period of the slide or, at least, failure to rise, of the output growth rates evidences that the national industrial sector has encountered new obstacles to the growth in output, with effective demand apparently not being a major challenge in this regard. Indeed, upon stabilization of growth rates in demand between July and August at rather a low level (+3 after clearing from seasonality and random fluctuations), it consequently began to gain its momentum and reached +7 by December, while production at that time was loosing its growth rates.

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