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In the IInd quarter 1999, the foreign capital was invested mostly in the real sector ( a. 74% of the aggregate volume of foreign investment in the IInd quarter). The branch structure of the foreign investment in the industrial sector is characterized by a high level of capital concentration in the fuel and food- processing sectors, on which 86% of all the investment in the industrial sector in the IInd quarter this year falls ( the respective index in the Ist quarter made up 51%). In the IInd quarter 1999 compared with the Ist quarter 1999, there was a substantial fall in foreign investment in the metallurgical sector- at 40.7%, and chemicals and petrochemicals- at 18.5%.

In general the positive dynamics of foreign investment in the industrial sector are still in place: for the Ist half 1999 the investment grew by 21.3% compared with the analogous period of the prior year, while the share of those in the total amount of foreign investment in the Russian economy grew from 29.4% in the Ist half 1998 up to 62.9% in the first half 1999.

The investment in the financial sphere continue to fall: in the second quarter 1999, the investment is accounted for USD 15 mln.: that is at 62.5% lower than in the first quarter. In the first half 1999 compared with the first half 1998, the foreign investment in the financial sector fell a. 15 times and made up USD 55 mln.

According to results of the first half 1999, of the spheres which remain attractive to foreign investors, the following ones can be singled out: the real sector, management ( USD 336 mln., or 7.9% of the total amount of foreign investment), trade and public catering, transport, and communication. In the first half 1999 compared with the respective period of the prior year, the re was the growth in foreign investment in transport ( 2.5 times), while the investment in construction fell 2.2 times. As it was in the first half 1998, the investment in the light industry, industry of construction materials and agriculture was insignificant ( though foreign investment in agriculture grew 4.6 times).

E. Ilyukhina

Compulsory reserves of commercial banks in the first half 1999

The analysis of a rich foreign experience of getting the banking sector out of crisis shows that the majority of countries which succeeded in that undertook comprehensive restructuring programs during the first year after the beginning o f the crisis. Russia is still far from that. It is most likely that the country would kiss other opportunities provided by the crisis to make the banking system more transparent for its clients, to develop the normative base and situation in the sphere of accounting, practical to implement the principle of owners’ and managers’ responsibility for the state of the bank, and other fundamentals of the banking restructuring. At the same time CBR undertook the steps which analysts regarded as mistakes, primarily the issuance of credits to insolvent banks. The situation was further deteriorated by the absence of CBR’s or government’s respective restructuring programs.

In a broader context, namely, identification of purposes of the macroeconomic policy- the revitalizing of the banking system was not a priority as well. The goals of overcoming the banking crisis which require budgetary costs also inevitably enter into conflict with the purposes of budgetary stabilization and the policy of maintaining the Rb. exchange rate. The latter clearly constituted the priority for the government and CBR. Thus, the lowering of the normatives of compulsory reserves is a standard method of support to the weakened banking system. CBR increased the normatives twice during the last half year: first in March 1999 from 5 to 7% with respect to legal entities’ and private persons’ funds denominated in foreign exchange; then in June- from5 to 5.5% by private persons’ deposits denominated in Rb. and from 7% to 8.5% by legal entities’ and private persons’ deposits denominated in foreign exchange. By accomplishing these measures, CBR practically have returned the level of deductions to the one as of August 1998 ( see Fig.1). Hence, the significant lowering of the norms of compulsory reserves which had been introduced in December 1998, was effective only during the period of the Ist quarter 1999. At that time, the respective normatives were two times lower than those set in March 1998 and effective as of the outburst of the crisis. At the same time, the burden of the Sberbank was higher than the average one: by the middle of the year, the Bank’s deductions to the Fund for Compulsory Reserves ( FCR) as per cent to its obligations were as much as 1.5 time higher than the averaged level without regard to Sberbank.

Hence, the economic policy pursued during the period concerned at least did not encourage an improvement of the banking system’s state. The higher inflation rate allowed the prompter getting out of the crisis than it could have been envisaged proceeding on from the crisis’s intensity. Financial instability is a usual environment for the Russian banks. In the unstable macroeconomic situation, the banks generate their profit at the expense of re-calculation of their assets denominated in foreign exchange and thanks to short- term speculations in the financial markets, primarily the foreign exchange market. The re-calculation of the respective items of the balance sheet which are denominated in foreign exchange, indeed, become a major source of revenues. At the same time, however, it also becomes, the major expenditure item. Comparing the situation after the 1995 crisis and the one after the 1998 crisis, one may find out that in the course of the latter the level of macroeconomic instability became higher than in the former case ( see Fig. 2-4), and to some extent it cushioned some banks’ deteriorating position. At the same time the situation has not come back to the first half of the ‘90s-neither by inflation rate, nor by the dynamics of Rb. exchange rate,- and the revenues from speculations cannot yet become the basis for the banking system’s prosperity. At the same time the government debt market still is far from its pre- crisis shape, and the Central Bank’s administrative measures constrain a chance to generate revenues from transactions in the market of foreign exchange. The inflation rate is not as such to devalue the overdue credits and therefore to help resolve the problem of ‘bad ‘ banking credits without special measures.


Banks compulsory reserves as % to obligations

1-funds on the FCR accounts with CBR

2- funds which banks failed to place in FCR

3- Rb.- denominated monetary funds with the bank’s cashier

4-Calculated by the data of banks operating as of mid-1999


Monthly change in CPI for month, %

  1. 1995- 1996
  2. 1998- 1999

Fig. 3.

Monthly change in Producer Price Index, as %

1 - 1995 - 1996

2 - 1998 - 1999

Fig. 4.

Monthly change in the Rb. exchange rate against USD, as %

1 - 1995 - 1996

2 - 1998 - 1999

M.Matovnikov, L. Mikhailov, L. Sycheva.

The real sector: factors and trends

During the first half 19999, the rate of the decline of GDP and output of products and services of the basic sectors of the economy was gradually slowing down. By the results of the Ist half 1999GDP made up Rb. 1,829.9bln. and fall by 1% against the respective period of the prior year. At the same time the output of products and goods by the basic sectors of the economy grew by 1.2% for the last eight months 1999compared with the period between January to August 1998.

The industry’s reaction to the change in the domestic economic situation emerged in the wake of the 1998crisis was rather prompt. Because of the Rb. depreciation and change in the structure of effective demand, the industrial sector experienced intensified trends towards development of import- substituting and export- oriented production. Since the IIIrd quarter, the industrial production has had positive dynamics, while the biases in the second quarter 1999may be attributed to the seasonality. During the period between January- August 1999, the increment in the gross output in the industrial sector made up 5.9%. It is worth noting that in the Ist half 1999the growth in industrial output was noted in 70% of the Russian regions. Practically all the industrial and production complexes demonstrated the revitalization. With the growing effective demand for domestic products, the stock of finished goods decreases, the share of shipment of goods to consumers grows, and the enterprises experience some improvement in their financial and economic state.

The dynamic development of the industrial sector and the corresponding growth in the services provided by the transport sector, wholesale trade and communication to a significant extent compensate for the fall in output in other industry branches and economy sectors.


Source: Roststatagentstvo

With the growth in industrial output, the sectors of the market infrastructure and services intensify their activities. However the formation of the market of services finds itself under the impact of contradictory trends.

It is the communication sector which still keeps its position as one of the most intensively developing sectors in the national economy. During the last two years, the sector have shown a steady growth in communication services which was back- upped by the growth in investment resources. Between January through July 1999, the increment in the volume of communication services made up 39.5% relative to the respective period of the prior year.

The dynamics of the index of trade market services are under the dominating impact of the fall in the turnover intensity in the retail and wholesale trade. The trend to the fall in retail trade turnover has been observed since early 1998, and that is induced by a systematic decrease in the population’s real income. Between January to August 1999, the turnover in retail trade fell by 14.3% compared with its respective period of the prior year. In the Ist half 1999, the share of trade in GDP made up 23.6%, and over 1/3of the services produced fell on the trade sector. The intensification of the decline in the sector has become the factor which intensified the trend towards contraction of the share of the output of services in the GDP structure.

In addition, the lowering share of the output of services in GDP to a substantial degree was affected by the further contraction in the volume of non- market services financed at the expense of the state budget and extrabudgetary funds. The stabilization in the market of services provided to the population was secured by a 2.6% growth in the output of paid services compared with the period between January-August 1998and pursuing the moderate tariff policy.

The structure of the use of GDP has formed under the impact of the trends towards alleviation of investment activity and contraction in the stock of material liquid assets and reserves. The share of gross accumulation in GDP dropped by 10per cent points compared with the Ist half 1998. Given that during the first half 1998the dynamics of the increment in liquid assets was affected by the crisis in sales, this year the situation radically changed. The trend to the contraction in the stock in liquid assets in GDP corresponds to the growing business activity in the industrial sector, growth in the volume of sales and contracting stock of finished products and material and technical resources.

The share of investment in capital assets in GDP became minimal for the last years and made up 12.1%. One of the reasons for the reduction in the investment activity in the first half 1999became the further contraction in the volume of financing the public investment expenditures. Even though this year the real sector’s industry branches showed some improvement of their financial positions, and their investment potential grows along with the growing profit, the producers still are very reserved and cautious towards making any investment decisions. The unstable political and economic situation unquestionably also affect the selection of the development strategy.


During last months the dynamics of industrial output are characterized with the remaining trend to growth which has emerged since late 1998. Between January to August 1999, the volume of industrial output grew by 5.9% compared with its respective period of the prior year, which became the highest value through the ‘90s. The depreciation of Rb. encouraged the development of export- oriented and import- substituting production and caused a visible growth in all major industrial sectors (Table 1).

This year, the situation in the external markets have been substantially more favorable for the Russian industry. Thus, the state of affairs in the world oil market may be characterized as the overcoming of the intensive 1998price crisis: at that time the oil prices slid by 35%, while since August through September this year the oil prices exceeded USD 20/barrel, which has become the peak value since autumn 1997.

Table 1

Dynamics of physical volume of industrial output between 1996- 1999, as % to the preceding year



















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