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2.3. Investment processes in the industrial sector

In 2000 the volume of investment from all the sources of funding amounted to Rb. 1,165.2 bln. and grew by 17.4% compared with its respective period of the prior year. During the year there was a stable trend to the advanced growth in investment in capital assets against the dynamics of GDP and output in the basic sectors of the economy. The proportion of investment in capital assets in GDP rose from 16.8% vs. 14.6% in 1999. The raise in investment activity in 2000 was accompanied by the growth in demand for construction services and capital goods. While comparing with 1999, the volume of works completed by construction companies grew by 11.5% and accounted for Rb. 530.3 bln., the gross output in the machine-building sector rose by 15.5%, and that of the industry of construction materials – by 7.6%

The raise in investment activity was accompanied by a change in the structure of financing of investments. With the growth in effective demand, practically all the sectors of the economy have improved financial indices of their performance. Since 1999 the structure of financing of investments has demonstrated the trend to a systematic raise in accumulation. The proportion of the accumulation fund in enterprises’ own investment resources rose by 20.5 percent points compared with 1999. With the growth in the production profitability rate, the correlation between enterprises’ own and attracted funds experiences changes. Let us note that in 2000 the raise of demand for investments found itself under a positive influence of the change in the structure of settlements between enterprises. With the growth in the share of monetary means in settlements for the produce and services delivered and enterprises accumulating their funds in liquid form, there is the emergence of investing in a form of mutual credits in place. In 2000, the share of borrowed funds in the structure of sources of financing of investment in capital assets rose at 1.6 percent points against its respective period of 1999.

Figure 2.33

Source: Goskomstat of RF

The inflow of external funds is closely correlated with the profitability dynamics. Whilst comparing with 1999, the share of attracted funds increased by over 6.3 percent points, however, with the share of banking credits in the structure of investment sources declining continuously. The latter is attributed to the remaining high risks, the absence of transparent schemes of the respective recipients’ operations and collateral mechanisms, an insufficient legal protection of operations on the investment market, and the absence of investment financial institutions.

Table 2.15

Structure of investment in capital assets
by their sources, as % to result

1997

1998

1999

2000

Investments in capital assets

100

100

100

100

Including by sources of funding:

Own funds

60,8

53,2

52,4

46,1

Of which

Accumulation fund

13,2

13,2

15,9

23,4

Attracted funds

39,2

48,8

47,6

53,9

Of which

Banking credits

4,5

4,8

4,2

2,9

Capital borrowed from other organizations

2,6

4,3

5,6

7,2

Budget funds

20,7

19,1

17,0

21,2

From the federal budget

10,2

6,5

6,4

5,8

From the budgets of the Subjects of the Federation

10,5

12,6

9,6

14,8

Extrabudgetary funds’ resources

10,8

3,8

Others

7,2

12,2

17,8

Of which the funds from stock issuance

0,4

0,7

0,5

Source: Goskomstat of RF

Whilst evaluating the investment dynamics in the real sector between 1999 to 2000, it should be noted that the raise of business activity in the national economy to a significant extent was generated by an intensive development of the industrial sector. Over the last two years the investment structure across industrial and production complexes underwent substantial changes. Given that between 1997 to 1999 the investment structure in the sector was changing thanks to the raise in the proportion of the consumer and metallurgical complexes, and chemicals and forestry, the growth in investment activity in the fuel sector between 1999 to 2000 became a crucial factor determining the change in investment flows across the sectors of the economy.

It was the fuel sector that in 2000 became a leader among other industry branches and in the economy on the whole in terms of the investment magnitude. The investing in mining industries has generated a string multiplying effect of renewal of demand for capital and intermediary goods. Whereas the production capacity of the mining industries is oriented primarily to the market for domestic capital goods, that initiated an accelerated raise in output in the respective sectors of the machine-building and metallurgical complexes.

The changes in the structure of machine-building output were determined chiefly by the growth in demand on the part of the industry branches of the oil sector, transport, and communication. It was these sectors that in 2000 reported the highest growth rates in investments in production.

The oil sector reported the placement into operation of over 3,000 new oil wells in 2000, while, however, 68.3% of the aggregate increment in oil output nationwide was ensured by the placement into operation of earlier idle wells. While comparing to 1999, the oil companies’ volume of operative drilling rose at 67.5%, while the volume of prospecting drilling- at 27.8%. The raising investment demand on the part of oil companies induced the acceleration of the rate of output of the equipment for extraction of hydrocarbon minerals. Despite an intensive raising of output of equipment for the national oil sector, its insufficient volume and a non-rational structure of its output did not allow a complete satisfaction of the increased demand on the part of operative drilling. At the same time, on the other hand, it is also insufficient investment that appeared the factor inhibiting the output growth rate.

Figure 2.34

As concerns the machine- building complex, its investment activity remained at a low level. Comparing with 1999, the share of investment in machine building and metal processing in the overall volume of capital investments in the industrial sector slid by 1.8 percent points.

Lacking a modern domestic machine-engineering base, the enterprises increase their costs for purchasing import second-hand machinery and equipment as a component of their overall investment costs. In 1999 the respective volume of investing in capital assets by this particular item were raised 2.7 times. In 2000, investments in import equipment of enterprises and organizations (exclusive of small entrepreneurs) accounted for Rb. 48.7 bln., or 22.9% of the total amount of investment in machinery, equipment, devices and instruments. At the same time the demand for second-hand equipment also grew on the part of enterprises of consumer sector that traditionally are oriented to the market for import equipment and enterprises of the sector for non-ferrous metal, wood-working and forestry sectors whose investment programs usually were based on the domestic production of capital goods.

The import of second-hand equipment, introduction in production of morally obsolete production capacities and expansion of the sphere of capital repair of the currently operating domestic and import equipment, along with limited capacity of the machine- building complex to produce modern equipment has become an obstacle to economic growth.

It is the processes of production restructuring aimed at increasing enterprises’ competitiveness that play an important part in changing the investment environment. In connection with that, the problems of diversification of investment flows and enhancement of the efficiency of the use of investment and accumulated capital assets become especially pressing. The analysis of the dynamics of investment activity over last decade shows that currently investments in capital assets roughly account for ¼ of the pre-reform (1990) level, while the volume of capital assets in the economy remained practically at the level of 1990. That can be attributed both to the specifics of capital assets re-valuation and a sharp deterioration of reproduction characteristics. The capital assets renewal rate in the industrial sector slid from 6/9% in 1990 to 1.0 in 1998, while the average age of of production equipment grew from 10.8 up to 16.1 years, respectively. The high level of the physical and moral depletion of capital assets, the unfavorable age structure of the machinery and equipment stock forms rather a rigid constraint to economic growth. With a long-lasting trend to the decrease in the share of gross accumulation in capital assets in GDP, the normal capital assets reproduction cycle has been broken. The calculations of the structure of gross accumulation in capital assets show an absolute decline in the net accumulation volume in place since 1995. In such a situation the enterprises’ investment activity has been reduced to maintenance of the accumulated capacity. The comparison between dynamics of output and changes in the structure of employment in the economy’s sectors and in the industrial sector demonstrates that with the trend to decline in technical and economic characteristics of the production apparatus and investment activity in capital-intensive industries, some exchange with labor and capital occurred. The maintenance of a high level of employment along with a traditionally high level of manual labor to a certain extent allowed compensation for the lack of investment resources, but at the same time that led to technological stagnation. When compared with 1995, the manufacturing industries and infrastructure sectors have shown a trend to an absolute contraction in the physical volume of capital assets.

Table 2.16

Indices of physical volume of capital assets across the sectors of the economy, as % to 1995

1996

1997

1998

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