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The three thirds of the innovation-activeenterprises are in the mechanical engineering, metalworking, food industry,chemistry and petrochemistry. Though the most intensive implementation of thenew technologies and developments is seen in such branches and the medical,microbiological, printing, flour grinding, cereal, combined fodder, and sewingindustries, their aggregate share in the branch structure of the industry isnot high. As the expenditures on the innovations do not exceed 3% of theaggregate volume of investments in the production purpose projects, theseprocesses do not influence on the change of the technological structure andindexes of renewal of the active share of the fixed capital. The technicalbackwardness of the production is the stumbling block of the Russianeconomy.

Investments in social sphere

In 1998, the volume of the constructionworks at the social sphere projects was insignificant. In 1998,Rbl.2.9billion were allotted for the construction of the social sphere andscience objects from the federal budget; this is 2% of the governmentalinvestments approved by the federal budget for 1998, including by branches: 16%for the education; 15% for the public health; 31% subway construction andculture; 29% for the science. The federal goal-oriented program for 1998 forthe social complex and science envisioned to invest the federal budget assetsfor fulfillment of the 51events of the federal goal-oriented program,including the presidential programs. Twenty of the federal programs were notfinanced at all, while the financing of all the others was at the extremely lowlevel.

The tendency to reduction of the dwellingconstruction rates has been observed since 1995. In 1998, the investments inthe dwelling construction were about 60% of the 1995 level. At the generaltendency to the reduction of the share of the state financing of the federaldwelling construction programs, the share of the assets from the federal budgethas been reducing, while the share of the subjects of Federation and localbudgets has been increasing. The private capital holds the dominating positionsin the dwelling construction.

In 1998, the governmental financing of thedwelling construction was 22% of the annual allotments from the budget. In1998, the highest importance program of granting the living premises for themilitary people, "State Dwelling Certificates", was fulfilled at 30%. Of the42,000 dwelling certificates for purchase of the dwelling premises only 13,000were issued indeed; only 7,000 of them were financed in fact. The "My Own Home"Federal goal-oriented Program for which the budget had envisioned to allotRbl.300million was not, in practice, financed. The subsidies to the peopleleaving the regions of the extreme North and equal status regions wereRbl.557.4million or 46% of the budget allotments of 1998.

On 16June1998, the Federal law "On RealEstate Mortgage" was adopted. This Law is considered one of the basic factorsfavoring the growth of the investments in the dwelling construction. Certaincities, towns, and regions of Russia have created the agency for the mortgagecrediting. However, the lack of the assets for developing this direction of thedwelling construction blocked the practical implementation of the mortgage in1998.

In certain regions, the dwellingconstruction was due to the out-budget sources. For example, the Belgorodregion and Mordovia used the out-budget funds for the country dwellingconstruction with the loans to be repaid by the agrarian produce. The Tambovregion organized the system of purchase of the homes by installment, using thedwelling accumulation accounts. In the Chuvashiya, Sakha (Yakutiya),Karachayev-Cherkesiya Republics, Archangel and Belgorod regions, the dwellingbonds were issued. In Ekaterinburg, several enterprises of various industriesand banks made the agreements on the joint construction of the dwellingpremises; the possibility to mobilize the financial resources of the localbanks by issuing the bills of exchange on the dwelling facilities underconstruction is the important element of the agreement.

Fig. 2.26

Source: Russian State Committee onstatistics (Goskomstat)

In 1998, the enterprises and organizationsof all forms of property put into operation 30.3millionm2 of the dwelling surface; this makes92.7% of the relevant figure of 1997.

Due to the fact that the share of thedwelling construction at the expense of the population remains high, the ratesof recession in this sector of economy are possible to hold down. While thevolumes of putting into operation of the dwelling premises by the state-ownedentities decreased by 18.3%, the putting into operation of the dwellingpremises at the expense of the population mobilizing the credits grew by 5.2%.The private capital safeguards its positions at the stable demand for thedwelling facilities; in 1998, the putting into operation of the dwellingpremises by the private investors grew by 21.7%.

While, from the beginning of the reforms,the dynamic of the offer in the dwelling market formed under the influence ofthe demand of the people with the high and medium incomes, as of today, itsdevelopment is limited by the reduction of the demand of the people with thelower income. However, this very circumstance is the factor holding down thedwelling prices. In 1997 and the first half of 1998, the potential purchaserswere the people with the average monthly income exceeding Rbl.7,000; thesewere less than 7% of the population. After the August crisis, the situation inthe real estate market radically changed. This has not, yet, effected thedwelling construction market; however, beginning from June1998, most of theconstruction entities have noted the trend to the reduction of theorders.

Construction complex

The evolution of the investment processesclosely correlates with the situation and operation of the constructioncomplex. The works performed in 1998 under the construction contracts costRbl.234.0billion (92% compared with the relevant period of 1997).

The financial crisis of the second half of1998 resulted in the partial cut of the construction works and growth of thenumber of the suspended constructions.

During 1998, the normative and legal basesfor improving the investment conditions were being formed. The normative andlegal basis for the contract tenders (accounting for the foreign and domesticexperience) has been, in general, created. In 1998, the governmental customers,holders of the budget assets, made over 60,000contract tenders. The cost ofthe contracts made exceeded Rbl.37billion or 91% of the offer cost of thegovernmental customers. However, the statistical data show the unwarrantedlyoverestimated number of the closed contract tenders: during the first 9monthsof1998, 50% of the tenders were either closed or under the quotationrequests.

2.5. Foreign investments in Russianeconomy

In 1998, the volume of the foreigninvestments mobilized to Russia grew due to the inflows falling on the share ofthe investments formed, mainly, by the credits of the indirect investors, e.g.,the World Bank, International Monetary Fund, European Bank for Reconstructionand Development, and the assets directed by the investors to purchase thegovernmental securities, mainly, the GKO-OFZ (Table2.23 shows them as the"Other investments"). Their share in the aggregate volume of the foreigninvestments of 1998 was about 70%.

Table 2.23

Structure of foreign investments in Russianeconomy






share, %


share, %


share, %













— direct









— portfolio


















Source: Russian State Committee onstatistics (Goskomstat).

As of the end of 1998, the aggregate volumeof the foreign investments was estimated as US$11.77billion; this was 95.8%of the 1997 level. The general unfavorable situation in Russia, the loss of theinvestment attractiveness, and the growing instability in the world stockmarkets induced, to the Summer 1998, the foreign investors to depart from theRussian market. The number of the investment companies operating in the Russianmarket reduced more than 3‑fold. In 1998, the market of the corporate securities did not,practically, participate in the processes of transformation of the resourcesfrom the financial sphere to the investment one due to the loss of theliquidity by the financial instruments. In 1998, the volume of the mobilizedforeign portfolio investments reduced by 72% compared with the relevant levelof 1997.

Fig. 2.27

Dynamic of foreigninvestments in Russian economy,
% of the previous year

The analysis of the dynamic of the directforeign investments shows that, as the political and social instability isgrowing, the tendency to the reduction of the foreign investments in theRussian economy is strengthening, as well. Thus, as of the balance of the firstquarter-year and the first half-year, the direct foreign investments were 86%and 54%, respectively, as compared with the relevant periods of 1997. In whole,in 1998, the aggregate volume of the mobilized foreign investments wasUS$3.36billion, or 63% of the relevant sum of 1997. The growth of theinterest rates on the credit resources, the high investment risk, the shrinkageof the domestic demand, the inefficient payment system of Russia, etc. havestrengthened the tendency to the reduction of the investmentmarket.

The branch structure of the foreigninvestments (see Table2.24) has also underwent changes in 1998, first of all,due to the significant cutback (5‑fold) of the share of the investments in the financial, crediting,and insurance.

Table 2.24

Branch structure of foreigninvestments












share, %










Transport andcommunications









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