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RUSSIAN ECONOMY IN trends and outlooks Decree of the Government from 25 November 2005 On the investment fund of the Russian Federation determined the procedure of maximum volume of the Investment fund formation as (1) the margin between the Federal Budget income, forming the Stabilisation Fund and calculated using the basic price for the crude oil grade Urals and the basic price of crude oil grade Urals decreased by 1 USD per barrel; and (2) forecasted reduction of expenditures for national external debt of the Russian Federation in case of its early repayment. The annual volume of In vestment Fund for each year of planning period should not be less than budget commitment for investment projects fulfillment in the corresponding planning pe riod.

In 2006 the means of the Stabilization Fund in amount of RUR 600 bln. were used for early repayment of the debt to the Paris Club. The total saving from the early repayment of the debt will be USD 7.7 bln, including USD 1.2 bln in 2007.

These funds have been transferred from the issue of interest rates expenditures to investments, the volume of the Investment fund having thus increased up to RUR 110 bln against allocated from the 2006 budget RUR 69.However, in spite of the increasing volume of the gross national saving, the analysis of operations with assets accounts illustrates the sustention of dispropor tion in the gross saving, gross accumulation resources and investments in the fixed assets in the environment of the gradually weakening loads of capital transfer op erations with the rest of the world on the economy. The share of the investments in the fixed assets in 2006 was equal to 16.8% of the GDP, the average level in 2001 2005 being 16.5%. (Table 2).

Table Structure of the GDP Use for Gross Saving and Gross Accumulation over 20002006 as % to the total 2000 2001 2002 2003 2004 2005 2006* GDP 100 100 100 100 100 100 including:

gross saving 38.7 34.2 31.1 31.9 33.1 33.6 33.of which:

Gross accumulation 18.7 21.9 20.1 20.8 20.9 20.1 20.Gross accumulation of fixed assets 16.9 18.9 17.9 18.4 18.4 17.8 18.Change in material circulation funds 1.8 3.1 2.1 2.4 2.5 2.3 2.For reference:

The share of the investments in the fixed 15.9 16.8 16.3 16.5 16.5 16.4 16.assets in the GDP * Preliminary data Source: Federal State Statistics Service As it was demonstrate by the past years experience, it is the very ratio of in vestment demand and final consumption that reacted most acutely on the fluctua tions of export revenues and determined the characteristic features of domestic market operation. Sharp fluctuations of investment expenditures for fixed assets reproduction were compensated chiefly by the smooth change in the dynamics of the final consumption. At the same time it should be taken into consideration that Section The Real Sector starting with the second half of 2005 a gradual restoration of investment constitu ent influence on the dynamics of the economy growth has been observed (Fig. 3).

2001 2002 2003 2004 2005 GDP Households final consumption Investments in fixed assets Source: Federal State Statistics Service Fig. 3. The Change in the GDP Dynamics by the Components of the Final Consumption in 20012006, as percentage to the corresponding quarter of the preceding year Households Final Consumption and the Change in Population Standard of Living Parameters The positive dynamics of final consumption was one of the key factors in do mestic market development throughout 20012006 real population incomes, real wages and real scale of granted pensions started to grow steadily. The increase in final consumption scale proceeded in the environment of relatively sTable preser vation of the ratio between households consumption and the amount of social transfers, received from the governmental institutions and non commercial organizations. In 2006 the share of expenses for final consumption in the structure of GDP was equal to 66.6% which is in line with the average figure for the last two years.

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I V V Y V V Y I I I I I I RUSSIAN ECONOMY IN trends and outlooks Table Structure of Gross Domestic Product Use over 19982004, as percentage to the total 2001 2002 2003 2004 2005 2006* Gross domestic product 100 100 100,0 100 100 including:

Expenditures for final consumption 65.8 68.9 68.1 66.9 66.4 66.of which:

Households 48.3 50.0 49.4 49.3 49.2 48.Governmental institutions 16.4 17.7 17.6 16.7 16.6 17.Gross accumulation 21.9 20.1 20.8 20.9 20.1 20.Net export of goods and services 12.7 10.8 11.3 12.2 13.6 12.* Preliminary data.

Source: Federal State Statistics Service In 2000 households final consumption reestablished at the pre crisis level of 1997 and during the next 6 years it increased by 78.6%. Increase in households consumption volumes was secured by steady population cash income growth.

Over 2001 2006 the population real incomes increased by 1.88 times, real wages by 2.18 times real scale of granted pensions by 1.48 times. It is the anticipating growth of the wages as compared with other sources of income that had the pre vailing influence on the population income dynamics. In 2006 the increase in real population incomes was equal to 11.0% against 11.1% in 2005, of real wages 13.5% against 12.6% and the real scale of granted pensions 13.5% against 9.6%.

Population incomes increasing, the steady decrease in the poverty level has been observed. The share of people with cash income lower than subsistence level was reduced to 22.5 mln. people in 2006, which comprises 15.8% of the total number of the population, as compared with 25.2 mln. people (17.6%) in 2004 and 42.mln. people (29.0%) in 2000.

Structural shifts in the formation of population cash income were accompa nied with the change in distribution of the population with respect to the value of average per capita income. In 2006 average per capita incomes having increased by 123.5% and face value of wages by 124.5%, the share of the population with the average per capita income higher than RUR 12000 has increased by 8.3 p.p., in the range of RUR 12000 6000 by 2.3 p.p., and with the income lower than 6000 decreased by more than 10.6 p.p. This, however, has not slackened social and economic differentiation of the population in regard to the income. According to estimations, fund coefficient, which characterizes the ratio of the average values of the highest and lowest incomes of the respective decile groups of the population, was equal to 15.3 times in 2006 as compared with 14.9 times in 2005 and 14.times in 2003. Gini coefficient, which characterizes incomes concentration, in creased up to 0.410 against 0.406 in 2005 and 0.400 in 2003.

Specific character of incomes distribution also determined the characteristic features of the current dynamics of expenditures and level of savings in the sector of households. Over the last 6 years the change in consumer expenditures was de termined by the increase in the expenditures for non food goods and services pro portion, proportion of the expenditures for food decreasing. It should be noted that at the existing level of income the statistical observation fixed the gradual shift of Section The Real Sector food sales assortment structure towards more expensive food, and of non food sales towards imported goods of better quality. The change in population de mand structure and the increase in the share of non food durable goods sales and furnishing intensified the development of the consumer crediting. The volume of credits allotted for individuals increased by 1.66 times. In 2006 the share of credits allotted for individuals was equal to 23.2% of the whole sum of credits granted by credit institutions against 18.9% in 2005 and 9.8% in 2003. It should be noted that in 2000 2006 the share of sales through trading organizations increased steadily. It was the anticipating growth of non foods market that had the prevailing impact on the increase of turnover in 2006 as well as in preceding years: the increase in food stuffs sales was equal to 10.2%, while in non food goods 15.6%. The change in consumer behavior is accounted for, to some extent, by structural shifts of prices in the main goods groups. Consumers prices growing by 9.0% in 2006, prices for foodstuffs increased by 8.7% from the beginning of the year, while for non food goods by 6.0%.

Payments for services Currency purchase Savings Goods purchase Compulsory payments Increase (+), decrease and fees (-) of cash money 2004 2005 Source: Federal State Statistics Service Fig. 4. Structure of Population Cash Income Use over 20042006, as percentage to the total RUSSIAN ECONOMY IN trends and outlooks The dynamics of consumer demand in 2006 was considerably influenced by the increase in demand for services. In comparison with 2005 the amount of paid services for the population increased by 8.1% against the background of price and fees for paid services for population growth rates slowdown down to 13.9% against 21.0% in 2005 and 17.7% in 2004. Fees growth rates slowdown was one of the sta bilization factors of the share of expenditures for payments for services in the structure of population cash incomes nearly at the level of 2005.

The factor that hindered the use of savings for the current consumption was still a high investment activity at the housing building.

Population real incomes growth rates accelerating since the second half of 2005 the tendency for restoration of the inclination towards savings has emerged (Fig. 4). In the structure of population savings the share of bank deposits and secu rities purchase was increasing while the expenditures for currency purchase were decreasing. The volume of attracted individuals deposits increased by 35.9% over 2006, including ruble deposits by 49.2%, against the background of decrease in currency deposits by 4.1% in comparison with December 2005.

3.1.2. The Specific Features of GDP Formation by Incomes The dynamic growth of the population incomes is one of the characteristic features of Russian economy consumers growth. The sustention of the domestic market dynamics was based on the growth of real wages and was accompanied by the redistribution of incomes from the enterprises to the population. In 2006 the share of workers for wages remuneration in GDP was approximately 44.2% and remained above the figures of 1999 2001(Table 4).

Table Structure of GDP Formation by Incomes over 20012006, as percentage to the total 2001 2002 2003 2004 2005 2006* Gross domestic product 100 100 100 100 100 including:

Labor remuneration of wage earners (including concealed) 43.0 46.7 47.1 46 43.9 44. Net taxes on production and import 15.7 17.0 16.0 17.0 19.7 20. Gross profits of economy and gross joint incomes 41.3 36.3 36.9 37 37.4 35.* Preliminary data.

Source: Federal State Statistics Service High differentiation of the average wages by economic activities was pre served. In the industry the level of wages differentiation was defined by the in crease in the gap between the rates of the labor remuneration in extraction and manufacturing industries. The nominal accrued wages in minerals extraction was two times higher than the average in the economy, including in fuel fossils extrac tion by 2.3 times. In manufacturing industries the wages were equal to 96% of the average in the economy and 48% of the figures of extraction industries. The ex ceeding of the average added wages figure by 2.0 and 1.97 times, respectively, Section The Real Sector was observed in productions, connected with processing and transportation of fuel fossils. In education, public health service the average wages were equal to 78% of the average in the economy, in government administration and military safety security to 125% and in financial activity to 230%. The characteristic fea tures of labor remuneration by the kinds of economic activity had a substantial im pact on the incomes and expenditures structure formation, population consumers demand as well as on the nature of employment and labor resources distribution in the economy.

Only 8% in the structure of the employed population account for people who do not work for a wage; these are employers, who attract employees on a regular base to work for their business, self employed people. This determined, corre spondingly, the character of the formation of population income structure and the GDP. More than 66.4% of population income and 44.2% of GDP accounted for the share of labor remuneration of those, who work for wages (Table 5). In the struc ture of the population cash income the share of the incomes from the entrepre neurs activity and property in 2006 was 18.4 % against 20.3% in 2005 and 17.1% in 2002.

Table Structure of Population Cash Incomes 19992006, as percentage to the total 2001 2002 2003 2004 2005 2006* Cash income total 100 100 100 100 100 Remuneration of labor, including hidden wages 64.6 65.8 63.9 64.9 64.8 66.Entrepreneurs activity income 12.6 11.9 12.0 11.7 11.4 11.Property income 5.7 5.2 7.8 8.3 8.9 7.Social payments 15.2 15.2 14.1 12.9 12.9 13.Other incomes 1.9 1.9 2.2 2.2 2.0 2.* Preliminary data.

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