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In addition, from 1August to31December1998, in order to protect the Russian sugar beet complex, thetemporary special duties were fixed for the refined and raw sugar imported fromoutside the FSU. The new duties were in excess of the effective custom dutyrates (25% on the refined sugar and 1% on the raw sugar) and made 74% of thecustom cost but nor less than ECU0.16 per kilogram for the raw sugar and 20%but not less than ECU0.055 per kilogram for the refined sugar. However, as theproduction of the sugar beet reduced, and after fixing the temporary specialduties the supplies of the raw sugar dropped, at the beginning of 1999, thetemporary special duties were lifted. This gives the ground to suppose that theRussian sugar factories will, soon, again begin processing the imported rawsugar. This and the prolongation of the supplies of the Ukrainian sugar withinthe limits of the duty-free quota to the end of March1999, complicate thesituation for the Russian producers of the sugar beet.

The other import limitation was thelifting, from 1August1998, of the privilege 10% rate of VAT applied to thefoods (see above).

On 15August1998, the 3% additional importduty was fixed to stay effective till 31December1999. This duty was in excessover the effective rates of the duties and on all the goods, including theagrarian produce and food, imported in Russia from other states, except themembers of the Customs Union. Obviously, the small sum of the duty was hardlycapable to limit the import flows to Russia. This gives the grounds to supposethe purely fiscal character of this measure.

In the second half of 1998, the evolutionof the external trade relations of Russia was influenced by the financial andeconomic crisis. The reduction of the import as a result of the devaluation ofthe national currency made the Russian Government approach the issues of theexternal trade regulation from the viewpoint of stabilization of the situationin the food market and support of the domestic processing industry, especiallythe milk and meat one.

To reinforce the base of the milk and meatindustry, from 27October1998, the import duties on the meat, milk powder, andcream were reduced. The duties on the foods of social importance, such asbutter and vegetable oil, baby food, and soybeans were cut as well. The newduties were adopted for the six-month term with the condition of the possibleprolongation.

The reduction of the limitations for theimport supplies of the agrarian produce and food was also manifested by thelift of the 3% extra duty made effective in August on certain agrarian produceand foods. The restoration of the privilege rate of the VAT on the wide rangeof foods has lied within this series of measures.

In the conditions of the economic crisis,the barter relationships between Russia and the former constituent republics ofthe USSR spread wider. The development of these relations was connected, forthe one hand, with the shortage in these states of the sufficient finance and,for the other hand, with the wish of the Russian Government to replenish thefood stocks. For example, Russia will exchange the fuel against the food fromLithuania. Byelorussia and Moldavia will repay their debts for the natural gasfrom Russia with the supplies of the food.

Being aware of the possibility of expansionof the export of the food from Russia after the devaluation of the nationalcurrency, the Russian Government imposed, in November1998, the licensing ofthe export of the sunflower seeds, rape, and soybeans. Besides, at thebeginning of January1999, for the first time since 1996, the food exportduties were renewed. The combined export duties were introduced on the soybeansand rape seeds, 10% of the customs cost but not less than ECU20 per MT and onthe sunflower seeds, 10% of the customs cost but not less than ECU15 perMT.

The oil-bearing crops are a traditionalitem of the Russian export, i.e., the only crop in which Russia has been netexporter during all the years of the reforms. Many economies of the south ofRussia have survived only due to the high profitability of these crops. Theexport limitations will result in their financial degradation with the furthernecessity of the financial support of these producers, as well. Meanwhile thedomestic market sees no deficit of the vegetable oil that could validate thereasonability of such measure.

2.4. Investments in realsector of economy

Sources of formation of investmentresources

The development of the positive processesin the investment sphere outlined in 1997 was suspended by the crisis in theworld and domestic financial markets. The growth of the refinancing rate,interest on the collateral credit, and norms of mandatory reserves worsened themain parameters of the credit and financial market. The reduction of theinvestment rating of Russia, the growth of the risks, and the sharp worseningof the investment climate initiated the outflow of the assets of thenon-residents from the Russian stock market, destabilizing even more thesituation in the financial and real sectors of economy. After the devaluationof the Ruble and declaration of the default for the internal debt, therecession of the business and investment activities intensified.

After the relative stabilization of 1997,in 1998, the gross accumulation reduced by 10.5% and the share in the GDP ofthe investments in the fixed capital was, to the end of the year, 15.0%. Theacceleration of the investment recession rate was conditioned by the increasedlimitations of the financing of the investment expenditures at the expense ofboth the own and the mobilized resources.

In the conditions when the own assets ofthe economic activity subjects form over 85% of all the investments in thefixed capital, the sharp reduction of the savings in all the sectors of economypredetermined the depth of the investment crisis. The reduction of theproduction profitability intensified the tendency to the reduction of the roleof the profit as source of financing of the fixed capital reproduction. Theshare of the profit in the investments in the fixed capital reduced, comparedwith 1997, by almost 1.7 percentage points making 11.2% in 1998. Though therole of the amortization deductions in the investments is growing, the growthof the prices on the capital goods narrows its functions to the limits ofreproduction of the fixed capital.

Table 2.24

Structure of investments in fixed capital bysources of financing, in prices of relevant years

structure ofinvestments in fixed capital, % of balance

share of investments in fixed capital, % ofbalance







Investments in fixedcapital








1. Own and mobilizedassets







of them:

own assets of enterprises







credits of commercialbanks







assets of out-budgetfunds














2. Assets of consolidatedbudget







of them assets of federal budget







Source: Russian State Committee onstatistics, preliminary data

The lack of the own financial assets forthe investment programs is not compensated by the mobilization of the assets ofthe others. The share of the bank credits in the structure of the investmentsin the real sector does not exceed 2.5% to 3%. In the first half of 1997, thereduction of the interest rates on the credits, the low inflation environment,and the reanimation of the production favored a certain growth of the long-termcredits to the real sector. This was also, to a high extent, favored by thereduction of the profitability of the transactions with the governmentalsecurities. The growth of the profitability of the transactions in thefinancial market within the period from October1997 to June1998 renewed theprocess of movement of the resources from the real sector to the stock andcurrency markets. The cost of the credit resources was growing, which limitedeven more the already modest possibilities to finance the realsector.

The Russian market of the corporatesecurities does not, in practice, fulfill the function of transformation of thefinancial resources into investments. The issuing of the corporate securitiesfinances less than 1% of all the out-budget investments, while in the countrieswith the developed economy this figure reaches 10% to 40%. In 1998, especiallyafter the crisis, the drop of the rate of the securities forced manyenterprises to reject the plans of the further issues and placement of theirsecurities in the market.

In 1998, the investments by the statereduced even more. According to the preliminary data, the share of the assetsof the consolidated budget in the investments dropped, as the result of thebudget crisis, down to 14.9% (from the 20.7% of 1997). The expenditures of thefederal budget on the investment purposes reduced from 9.5% in 1997 to 4.8% in1998. The governmental investments from the federal budget reduced, in theabsolute figures, from Rbl.30.2billion in 1997 to Rbl.14.7billion in 1998;only 1/4 of them was financed. As a result, their share in the total volume ofthe investments in the fixed capital reduced from 7.3% in 1997 to the 3.7% in1998.

In 1997, the governmental financing of thebasic industries was Rbl.0.9billion, or 21.7% of the annual budgetgoal-oriented allotments by the production complexes. The investment projectsand federal goal-oriented programs were financed as follows (percent of therelevant annual goal-oriented allotments): 10% for the fuel and energy complexand the mechanical engineering one; 11% for the chemical complex; and 30% forthe transport and communications complex. The short financing of the "RussianPeople's Telephone" Federal goal-oriented Program, the reduced volume of theinvestments in the communications from all the sources of financing, (by 8%from the level of 1997), and the reduction of the foreign investments (byalmost 63%) affected significantly the scale of construction of thecommunication projects and the dynamic of the communicationsdevelopment.

The dynamic of financing for the specificprojects of the goal-oriented investment program, namely, the non-governmentalnon-commercial organizations, was directly dependent on the implementation ofthe mechanism of financing fixed by the order of allotment of the finance fromthe federal budget in accordance with the Government Act of 1June1998 #548.Due to the long period of the legalization of the transfer of the shares to thestate, practically no commercial entities were financed.

The Federal investment program for 1998 hadenvisioned the start-up of the 267 most important projects of the productionand social sphere; however, only 15projects were started up, only 10 of themwere started up at the full capacity. At most of the start-up projects, thetechnical readiness was less than 50%. Of the 350 projects having won theinvestment tenders and supported by the state only 6 were started up in 1998for the full capacity.

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