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The analysis of the governmentalinvestments shows that the growth of the accounts payable for the worksexecuted exceeded, to the end of 1998, the volume of the governmentalinvestments for 1999. In these conditions, the investment program is limited tothe support of the extremely narrow range of directions. Taking into accountthe acute crisis of the budget and finance system and strict sequestering ofthe financing of the federal investment programs during these last years, nopositive changes are foreseen for this sphere in the nearestfuture.

The total volume of the investments in thefixed capital from all the sources of financing made, in 1998,Rbl.402.4billion, or 93.3% of the 1997 level. In the first half of 1998, theinvestments in the fixed capital reduced by 6% compared with the relevantperiod of 1997. From September1998, the investment recession intensified. Inthe fourth quarter of 1998, the investments in the fixed capital decreased by8.4%.

Fig. 2.23

Change of dynamic of investments in fixedcapital in 1997-1998 (% of the relevant period of the previousyear)

The recession of the investment activity in1998 affected to the greatest extent the investments in the production sphere.During the last two years, the certain growth of the production constructionshare was observed; at the end of 1997, even the positive dynamic was restored.With the change of the macroeconomic situation, the investments in production,from all the sources, reduced by 10.5% compared with the 1997 level. Theabsolute volume of the investments in the construction of the productionprojects reduced by almost Rbl.13billion, down to Rbl.250.1billion;meanwhile, the prices of the construction and erection works grew by 9.7% andthe prices of the machinery and equipment grew by 20.7%. As for thenon-production projects, Rbl.152.3billion were invested there; in 1998, theshare of these investments grew up to 37.8% against the 35.5% of1997.

The investment crisis called forth theprocess of cutback of the economic activity in practically all the sectors andbranches of economy. From the beginning of the reforms, the structural shiftsin the economy have been seen on the background of the investment in the sphereof services. Thus, while in 1990, 56.7% of the investment fell on the capitalproducing the goods, in 1998, the relevant share decreased to 46.7%. However,the last three years have shown a certain growth of the investments in thebranches producing goods.

Table 2.22

Structure of investments in fixed capital bysectors and branches of economy, % of balance





Investments in fixed capital, total






Branches producinggoods





Of them
















Branches renderingservices





Of them:





















Source: Russian State Committee onstatistics (Goskomstat)

It should be noted that these last years,the changes of the branches structure have been influenced, for the one hand,by the intensive investments in the fields of the natural monopolies, i.e.,fuel industry, energy production, transport, and communications and, for theother hand, the lowering of the business activity in the processing industriesand agrarian economy. The share of the investments in the agrarian economy hasreduced, during the last eight years, by the 12.5percentage points, down to3.4% in 1998. The cutback of the demand for the construction services andshortage of the own financial resources reduce the investments in theconstruction complex.

The relatively stable tendency to thegrowth of the share of the industry in the total volume of investments wassupported by the travel of the capital to the extracting, export-oriented, andcompetitive industries.

In the industry sector, the greatest shareof the investments fell on the fuel and energy complex, whose share of 1998 was61.0% of all the investments in the industry against the 32.4% before thereforms. However, with the worsening of the world conjuncture in the market ofthe energy resources and reduction of the incomes from the export activities,the volumes of the investments in the fuel industry have been reducing, aswell. In 1998, the total volume of investments in the fixed capital of the fueland energy complex reduced by almost 29% compared with the precedingyear.

The investments for support of the oilextraction reduced, compared with 1997, by more than 26%; the extension anddevelopment drilling reduced by 39% and 22%, respectively; the start-up of thenew wells reduced by 21%; the start-up of the new fields reduced by 37.5%. Theprogram of reconstruction and updating of the operating production facilitiesof the existing refineries and construction of the new ones was practicallyfrozen, because here the volume of investments reduced by 25% compared with1997.

Fig. 2.24

Change of structure of investments in fixedcapital by industries (%)

Source: Russian State Committee onstatistics (Goskomstat).

In the gas industry, the volume of theinvestments in the fixed capital from all the sources of financing was about60% of the 1997 level. This did not allow to ensure the start-up of theprojects needed for the support of the stable level of the gas extraction andreliable supply of it to the consumers. The reduction of the investmentresulted in the longer terms of construction and growth of the volumes of theunfinished construction. The negative effect on the investment activity of theindustry also came from the reduction of the gas prices in the external marketbecause the hard currency incomes from the export are practically the onlysource of financing of the investment activity.

In the electric energy production, thetendency to the aging of the production funds remained effective (in 1998, thenewly started-up capacities were less than 10% of the technically necessarylevel of renewal of the fixed capital). One of the main causes of the situationis the strong shortage of the investment resources resulting from thenon-payments of the consumers for the consumed electric and heatenergy.

The implementation of the program ofrestructuring of the coal industry allowed freeing over 92,000 employed andraising the labor productivity per worker by 3.5% compared with 1997. Thevolume of the investments in the fixed capital from all the sources offinancing reduced, in 1998 compared with 1997, by over 20%; the start-up of thefixed assets reduced by 17%.

Fig. 2.25

Technological structure of investments in fixedcapital

Source: Russian State Committee onstatistics (Goskomstat).

The situation and outlooks of thedevelopment of the extracting sector of the industry are beginning to bedetermined, to the greater and greater extent, by the dynamic of theinvestments in the development of the mineral feedstock base. However, duringthese last years, the share of the expenditures on the prospecting has beenconstantly reducing.

According to the preliminary data, theestimate cost of the prospecting performed in 1998 and financed from all thesources was Rbl.15.6billion which is, in the comparable prices, by 12% lowerthan in 1997. With this, in the first half of 1998, the volume of the worksexceeded the level of the relevant period of the previous year by 13% butreduced sharply beginning from the third quarter-year. The reduction offinancing in the fourth quarter-year resulted in the complete suspension ofdrilling of the deep exploration wells for oil and gas.

The main share of the prospecting works(about 70%) was financed from the allotments for reproduction of the mineralfeedstock base from the subjects of Federation and the money remaining at thedisposal of the mining enterprises. The money from the federal budget was usedto finance the prospecting works for Rbl.1.3billion, and the debt to thebudget for the works executed for the federal needs was Rbl.354million. Thereduction of the oil prices resulted in the reduction of the allotments onreproduction of the feedstock base; hence, the cutback of the prospectingworks. Under the crisis, the practice of the non-purpose use of the assets fromthe budget fund for reproduction of the mineral feedstock base became wider.Besides, the worsening of the general economic situation in the countryresulted in the sharp drop of the foreign investment in the geologicalprospecting of mineral resources. In this connection, the volume of the deepexploration drilling for oil and gas in 1998 was by 22% smaller than in1997.

In 1998, the increment of the exploredreserve did not, just as before, ensure the compensation of the annualextraction of the most important fuel and energy resources. The reduction ofthe deep exploration drilling during these last years prevented from revealingthe fields of large and medium size reserves. Only the small-size fields withthe difficult to extract reserves were involved in the development; this didnot even compensate the lowering levels of the oil extraction. Themetallurgical enterprises have also begun to feel the shortage of the feedstockbase. In the new, potentially promising regions, in particular, East Siberiaand Republic Sakha, the prospecting works have been fullysuspended.

Reproduction and technological structure ofinvestments

From 1995, the reproduction structure ofthe investments in the fixed capital has had the stable enough share for thetechnical re-equipment, reconstruction, and expansion of the operatingenterprises: it has been about 58%. With this, the share of the investments inthe active part of the fixed assets within the technological structure of theinvestments in the fixed capital has been steadily reducing. In 1998, the shareof the investments in the machinery and equipment was 23.5% against the 36% in1997. The equipment renewal factor in the industry dropped from 6.0% in 1990down to 0.7% in 1997.

The start-up of the new equipment does notcompensate the natural wear of the equipment fleet. Almost two thirds of theproduction equipment is older than 15years, and the wear and tear of the fixedassets exceeds 50%. The average actual life has been constantly growing duringthe last ten years, and has exceeded the normative life almost 2.5‑fold. The ratios of the renewalrates liquidation rates, and average age of the equipment show that the supportof the actually formed age of the fleet of machinery and equipment in theindustry is possible only at the simultaneous increase of the start-up andremoval factor almost three-fold.

The share of the enterprises developing andimplementing the technical innovations in the industry did not exceed 5%. Thehighest share of the innovation expenditures falls on the purchase of the newmachines, equipment, and plants required for the technological renewal of theproduction. The own assets of the enterprises form the main source of financingof the investments. The exceptions are the individual enterprises of themechanical engineering, gas industry, and glass manufacture, whose innovativeactivity is supported by the participation of the foreign capital.

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