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Table Inflow of Foreign Investments in the Russian Economy in 2002USD mln. As percentage to the previous year Total Direst Portfolio Others Total Direst Portfolio Others 2002 19 780 4 002 472 15 306 138.7 100.6 104.7 155.2003 29 699 6 781 401 22 517 150.1 169.4 84.98 147.2004 40 509 9 420 333 30 756 136.4 138.9 83.0 136.2005 53 651 13 072 453 40 126 132.4 138.8 136.3 130.2006 55 109 13 678 3 182 38 249 102.7 104.6 700.0 95.Source: Federal State Statistics Service.

Analyzing the dynamics and the structure of the foreign investments it should be first of all taken into account that nearly 3/4 of the total amount of the invest ments, flowing into non financial sector of the economy, belong to the group of other investments trade credits, foreign countries governments credits ex tended under the provision of the Government of the Russian Federation, interna tional organizations credits, other credits and bank deposits. Bearing in mind high proportion of this component in the structure of the foreign investments, the change in the dynamics influences greatly the total foreign investment rates figure in the non financial sector of the economy.

Another characteristic feature of the foreign investments in the Russian econ omy is the low proportion of the portfolio investments. Over the last 3 years the share of portfolio investments on average did not exceed 1% against 3.2% in and 2.4% in 2002. The trend for the decrease in the portfolio investments, which was observed in 2003 2004, in 2005 was substituted by the positive dynamics. The specific feature of 2006 was almost sevenfold increase in portfolio investments, di rect investments growing but slightly and other investments having negative dy namics.

RUSSIAN ECONOMY IN trends and outlooks 3980 451 2000 2001 2002 2003 2004 2005 direct investments portfolio foreign investments Fig. 35. The Amount of Direct and Portfolio Investments Made to Non financial Sector 20002006, mln.USD The positive dynamics of the direct investments was observed since 2002, their growth being anticipating in comparison with portfolio investments up to as well as compared with the internal domestic investments in fixed assets, in 2006, however, the increase in the direct foreign investments was only 4.6% versus 38.8% in the previous year. As a result the share of the direct investments in the total amount of the foreign investments made to the Russian economy in 2006 was equal to 24.8%, which roughly corresponds with the level of the preceding year.

Portfolio investments growth acceleration was connected with the increase in the activity of the foreign investments at the stock market. Investments in shares and stocks grew by 8.8 times and were equal to USD 2.9 bln. Other foreign invest ments, defined as trade credits, foreign countries governments credits extended under the provision of the Government of the Russian Federation, as well as inter national organizations credits and bank deposits for the first time over the past years demonstrated the negative dynamics.

The foreign investments growth slowdown was accompanied by the change in their flow structure by the kinds of the investment activities. The increase in the in vestments into industry slowed down to 1.2% against 20.6% in 2005. For the first time over the last 5 years the absolute reduction in investments in trade was ob served. In 2006 high rates of foreign investments growth sustained in transport and Section The Real Sector communication, their proportion in the total amount of the foreign investments as a result increased up to 9.6% against 5.0% in 2004.

Table Inflow of the Foreign Investments by Kinds of Economic Activity in 2004In USD mln As % to the preceding year As % to the total 2004 2005 2006 2004 2005 2006 2004 2005 Industry 20 170 24 318 30 603 163.6 120.6 101.2 49.8 45.3 44.Transport and com 2 033 3 840 5 297 187.7 188.9 137.9 5.0 7.2 9.munication Whole sale and retail trade; motor vehicles, motorcycles, house 13 037 20 461 13 089 124 156.9 64.0 32.2 38.1 23.hold appliances and articles of private use service Real estate operations, renting and provision 2 572 2 602 5 988 75.6 101.2 230.1 6.3 4.8 10.of services Financial activity 1 001 1 813 4 698 156.4 181.1 259.1 2.5 3.4 8.Other industries 1 697 617 885 98.3 36.4 231.8 4.2 1.2 2.Source: Federal State Statistics Service.

The foreign investments in the industry growth rates slowed down. For the first time since 2000 the decrease in the amount of the investments in manufacturing industry was observed.

According to the state of affairs by the end of 2006 the accumulated foreign capital in the Russian economy comprise USD 142.9 bln., exceeding the figure of the previous year by 27.8%. The share of the direct investments in the accumulated foreign capital was equal to 47.5%, port folio investments 3.4%, other investments, fulfilled at the returnable routine international organizations credits, trade credits having the biggest proportion of 49.1%.

In the total amount of the accumulated foreign investments, made to the Rus sian economy, the leading positions are still held by Cyprus, Netherlands, Germany and Luxembourg, whose share was equal to 63.6% of the total amount of the ac cumulated investments and more than 80% of the accumulated direct investments.

In the structure of the accumulated by the end of 2006 investments it is the di rect investments that prevail, whose share was 47.5% against 44.5% in the previ ous year.

Against the background of the economic growth acceleration the Russian economy is becoming more and more attractive for foreign investors. One of the main guiding lines for the new investors to come to the Russian market and for al ready operating investors to wish to increase the amount of the investments is the ratings of the world agencies Fitch, Moody's and S&P (see chapter 2.5.3 of this re view).

RUSSIAN ECONOMY IN trends and outlooks Table Accumulated foreign investments as broken down by Major Investing Countries Accumulated by the end of As percentage to the Including (USD mln):

2006 previous year total, (USD as % to the direct portfolio others total direct mln) total Investments total 142 926 100 67 887 4902 70 137 127.8 136.of which the major 123 871 86.7 58 502 4245 61 124 124.9 134.investing countries including:

32 276 22.6 22 796 1358 8 122 167.4 163.Cyprus Netherlands 23 451 16.4 19 234 62 4 155 124.0 119.Luxembourg 22 870 16.0 587 203 22 080 109.0 130.Germany 12 260 8.6 3 320 1692 7 248 126.1 122.Great Britain 11 801 8.2 2 907 169 8 725 92.5 142.USA 7 698 5.4 4 588 507 2 603 112.5 105.Virgin islands (GB) 4 259 3.0 2 410 102 1 747 172.9 200.France 3 699 2.6 1 058 0.0 2 641 94.4 116.Switzerland 2 832 2.0 1 353 151 1 328 119.8 119.Japan 2 725 1.9 249 1 2 Source: Federal State Statistics Service.

The increase of the investment activity will be assisted not only by awarding Russia high credit ratings by the leading world agencies but also by the efforts of the Government to change the investment climate in the country for the better.

3.4. Foreign Trade 3.4.1 Foreign Trade Turnover In September 2006 International Monetary Fund issued regular semi annual report on the world economy situation and short term development prospects.

In first six months of 2006, as it is stated in the report, the steady growth of the world economic trend sustained. In 2006 the rates of the world GDP increase, ac cording to the forecast, should have been equal to 5.1%, while in 2007 they will slow down to 4.9%. The current economic upsurge is the most stable since the be ginning of the 70ies. Favorable forecast is based on such positive factors as mod erate inflationary pressure, which is not supposed to grow due to a moderate in crease in interest rates of large countries central banks, expected balancing of domestic demand in developed countries, as well as situation stabilization at the world financial market. Business activity in most regions and countries was at the level of or above of that predicted.

It is multilateral liberalization of the world economy, as well as taking meas ures against the strengthening of protectionist pressure that remain important conditions for the world economy growth.

Section The Real Sector Table Dynamics of the World GDP and the World Trade (as percentage to the previous year) 1) 2) 2004 . 2005 . 2006 . 2007 .

GDP World as a whole 5.3 4.9 5.1 4.Industrially developed countries 3.2 2.6 3.1 2.USA 3.9 3.2 3.4 2.EU countries 2.1 1.3 2.4 2.Canada 3.3 2.9 3.1 3.Japan 2.3 2.6 2.7 2.Other developed countries 4.6 3.7 4.1 3.Developing countries and countries with economy in transition 7.7 7.4 7.3 7.Countries of Central and Eastern Europe 6.5 5.4 5.3 5.CIS countries 8.4 6.5 6.8 6.Russia 7.2 6.4 6.5 6.Asian countries 8.8 9.0 8.7 8.China 10.1 10.2 10.0 10.Goods and services world trade 10.6 7.4 8.9 7.Import Industrially developed countries 9.1 6.0 7.5 6.Developing countries and countries with economy in transition 16.4 11.9 13.0 12.Export Industrially developed countries 8.8 5.5 8.0 6.Developing countries and countries with economy in transition 14.6 11.8 10.7 10.Footnotes. 1) Estimation. 2) Forecast Source: The Bulletin of Foreign Commercial Information No 125.

In 2006 indices, characterizing Russian foreign trade, grew steadily and reached record over the last 15 years levels. Russian foreign trade turnover, calcu lated on the basis of balance of payments methodology, was equal to USD 468.bln., exceeding significantly yearly figures of the previous years (Fig. 36).

500,450,400,350,300,250,200,150,100,50,0,1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Export beyond CIS Export to CIS Import from beyond CIS Import from CIS Source: Central Bank of the Russian Federation Fig. 36. Russian Foreign Trade Turnover (bln. USD) RUSSIAN ECONOMY IN trends and outlooks The increase in foreign trade turnover in 2006 is accounted for by a significant growth in monetary volume of export sales thanks to a favorable situation at the world market, particularly at the market of mineral resources used as sources of power, as well as noticeable import growth due to the increase in domestic de mand.

In comparison with 2005 Russian foreign trade turnover went up by 27%. At the same time the turnover with countries, which are not CIS members, grew at higher rates. Over 2006 it reached USD 399.7 bln., which is by 27.5% higher than the corresponding figure of 2005. Russian trade turnover with CIS countries in creased by 24% and reached USD 68.7 bln.

Foreign trade surplus in 2006 was equal to USD 140.7 bln., which is much bigger than in 2005 (USD 118.3 bln.). This is mainly due to price situation factor.

3.4.2. Situation at the World Market According to the estimations of the Bank of Russia, the world prices, taking into account the structure of Russian export by the set of goods, which include 80% of its cost, were 22% higher than in 2005.

From January to the middle of August prices for oil at the world market in creased most of the time. In the second half of August and in September a signifi cant drop in prices was observed.

In 2005 OPEC member countries called off the limits of official price range for the basket, which was USD 2228 per barrel. From March 2006 price interval for oil basket was declared by the marks of USD 50 and 60 per barrel.

The average price for oil grade Brent was by 19.8% higher, for oil grade Urals by 21.1% more expensive in 2006 in comparison with 2005. Unprecendented maxi mum for OPEC basket is price mark of USD 72.67 per barrel, which was observed on 8 August 2006.

In 2006 prices for oil products were on average higher than in 2005 (premium petroleum being 18%, diesel fuel 15%, furnace fuel oil by 30% more expen sive).

Within January October 2006 natural gas went up in price by 36% in Europe and fell in price by 20% in the USA in comparison with the corresponding period of the previous year.

In 2006 world prices for the production of the Russian fuel and energy com plex were 25% higher than in 2005.

In 2006 the world market was characterized by the growth of demand and prices for ferrous and non ferrous metals. In the environment of world demand in crease the expansion of international trade of metal production was observed.

In December 2006 the world prices (West European market) were equal to:

reinforcing steel USD 530 550 per ton (increased by 21% as compared with January 2006), rod USD 490 510 per ton (increased by 15%), girders and chan nels (300 600 mm) USD 520 540 per ton (increased by 2.9%), hot rolled sheet USD 600 per ton (increased by 56%), cold rolled sheet USD 620 per ton (in Section The Real Sector creased by 20%) and zinc coated sheet at the level of USD 700 per ton (in creased by 25%).

Favorable situation at the foreign market persisted for non ferrous metals ex porters as well, the level of world prices for all non ferrous metals reached a maxi mum over the period of more than last 13 years. In May 2006 the average prices for aluminum and copper were top since 1994. The prices for nickel reached peak level in August 2006 (Table 50).

The increase in prices at the world market of non ferrous metals was caused by demand increase, low level of reserves at exchange stocks and anticipating growth of prices for raw materials for their production (alumina, copper and zinc concentrates).

The biggest increase in prices was observed for zinc and nickel as a result of a significant growth in demand for these metals, especially from the enterprises, manufacturing coated and stainless steel (Asian countries, especially the Republic of China).

At the world market of non ferrous metals, according to the results of London Metal Exchange quotations with the immediate delivery period, the prices at the end of December 2006 were: aluminum USD 2824 per ton (increased by 13% as compared with January 2006), copper USD 6375 per ton (increased by 30%), nickel USD 34300 per ton (increased by 2.3 times), zinc USD 4230 per ton (in creased by 82,5%), lead USD 1645 per ton (increased by 17%), tin USD per ton (increased by 45%).

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