Russian Economy: Probable Parameters of Socioeconomic
Development for the Year 2000 and the Period till 2002



     Elaborating a forecast of socioeconomic development for the coming year and mid-term perspective primarily requires a non-biased estimate of the basic state of economy primarily.

     The model of Russian economy as it developed during the reform years is characterized by raw material export orientation, excessive import pressure in conditions of rapid expansion of economy openness, high income and con-sumption differentiation of the population, low investment level and monetization.

     State control of macroeconomic proportions necessary for transition to steady economic growth was lost. Existing advantages and potential of the Russian economy (high personnel qualification, relatively low labor costs, rich natural re-sources, developed technical-scientific potential) were not used to the full ex-tent. Both fiscal policy and the policy to keep the ruble exchange rate within a predefined currency "corridor" proved inefficient.

     To a great extent it were these circumstances (along with consequences of "Asian" financial crisis and disadvantageous foreign market condition) that have determined exacerbation of financial and macroeconomic crisis in Russia in 1998, the acute phase of which started in August.

     In the end of 1998 - beginning of 1999 some improvement of the economical situation in a whole series of parameters indicated. Inflation was characterized with reducing rate. After a leap in September, the subsequent dynamics of the ruble exchange rate was determined by a smoother cyclical amplitude.

     Positive trends appeared in the industry growth dynamics influenced by improv-ing situation for Russian exporters and significant moderation of competition of import, and appeasement of "money hunger" in the real sector of economy. Monthly dynamics analysis of industrial output allows to speak of the beginning of production growth starting from October 1998.

     At the same time, the situation in economy remains complicated and contradic-tory. The budget sphere problems determined by foreign debt service remain acute. The question of state debt payback and restructuring as well as new foreign loans being still in suspense exercises negative influence on the economic situation.

     The investment activity in the real sector of economy is not restored, investment risks under the situation of political and economical instability remain very high. After a steep reduction of the population's real disposable monetary incomes in September 1998, the trend of its restoration is still very weak at the beginning of the this year. As a result, the internal demand is decreasing, what hinders the achievement of steady economic growth. For the time being, production growth is mainly determined by changes in the export and import dynamics related to ruble devaluation.

     When developing basic figures of 2000-2002 forecast, both major trends of socioeconomic development in 1998-1999 and necessity of consequent over-coming disparities inherited from the period of administrative planned economy management and disparities emerged during the economy liberalization were taken into account. A respective set of measures of the Government and Bank of Russia is provided.

     In the coming years, it is important not only to achieve the economy revival, but also to come to its growth with a rate of 5 and more annual percents on average for a long period. Only under such circumstances it will be possible to solve the problems of increasing public welfare, social sphere development, renewal of productive facilities and state debt service simultaneously.

     Creating a new economy model in 2000-2002 and coming onto the trajectory of dynamical growth will require substantial modification of principal macrostructure proportions on the basis of:

      reinforcement of production orientation at domestic demand and reduc-tion of the import share in its structure. In the coming two years, the prin-cipal source of growth from side of end-product demand will remain in-creasing of the domestic goods share, later-production investments, and-as soon as financial restrictions weaken-state demand;

      unblocking growth sources of domestic demand, first of all in favor of ex-tractive industry. The principal levers of growth during the period under consideration will be (1) branches of consumer complex providing for supply of domestic goods, (2) engineering branches producing invest-ment equipment, (3) high-tech engineering branches allowing to renew the equipment of up-to-date quality level;

      balanced (to the production and inflation dynamics) growth of monetary stock with concurrent change of its structure in favor of funds on enter-prises' accounts. The speed of money cycle in the economy shall decel-erate and its monetization shall increase; the factors of such changes are reduction of defaults, expulsion of barter and substitute moneys, tighten-ing of requirements to enterprises' solvency and increasing of popula-tion's propensity to saving.

     The performed analysis and forecasting estimates (including estimates till the end of the current year) show that the socioeconomic development of the coun-try in the mid-range period is mot probable in the limits described in two scenarios. They are mainly distinguished by influence of conditions not being directly economic.

     The first scenario presumes from reaching agreement with principal creditors of Russia on debt restructuring and writing off the most part of the former USSR debt.

     The second scenario is based on a less favorable outcome of negotiations on debt restructuring and write-off, possible delay in receiving foreign loans. In this scenario, potential disadvantageous dynamics of world market price for raw materials and probability of deceleration in realization of a series of primary measures to strengthen the budget revenues are taken into account (in this connection, the efficiency of bills proposed by the Government, being passed by the State Duma is of principal importance). In the event when the situation would develop according to the second scenario, more substantial price ad-vance, more substantial ruble devaluation will take place, what would have im-pact on deceleration of reaching the target macroeconomic indices.

     Economy Development in 1999-2000

     The parameters of 2000 are largely predetermined by the development of socio-economic situation during the year 1999. The results of the IV quarter of 1998 and the beginning of 1999 have determined the adjustment of some indices in the socioeconomic development forecast for the year 1999, prepared in Novem-ber 1998, which was the base to develop the 1999 Federal Budget. Subject to later terms of expected reception of international organizations' credits provided earlier, the 1999 inflation rate is forecast to be higher than it was provided in the target forecast variant which proved too optimistic, and will, as estimated, amount to 45% (according to the first scenario) through 60% (second scenario).

     The GDP growth rate in 1999 (in the "fork" of scenario variants) is estimated to be at the level of 98-100.5%, and the industry output volume 101.5%-103.5% respectively, as compared to 97% of the earlier forecast, which produces rather acceptable start conditions of socioeconomic development in 2000. The volume of investments into fixed assets is estimated to be at the level of 95-100% in the scenario "fork".

     According to the first scenario, positive dynamics of GDP growth is forecast in 2000 as compared to the 1999 estimate (within 1.5%), investments into fixed assets-approximately 2% (see Table 1). In this case, active investment growth is most probable in the second semester, after the finish of the presiden-tial election campaign.

     The inflation rate according to the first scenario will be 22%, or approxi-mately 1.7% monthly on the average.

     The industry output growth is estimated to be within 2.5% to the 1999 esti-mate. At the same time, the production in food, timber, woodworking, pulp and paper industry will grow by 3% according to the first scenario. Still higher development rates will be in petroleum industry, engineering and metal processing (104%), light, chemical and petrochemical industry (105%). The production output in industry of fuel and primary resources-coal, gas, oil extraction industry and non-ferrous metallurgy-will be at 100-102% to the ex-pected 1999 level.

     Due to the outgrowing product output of processing branches in 2000, the structure of industry production will improve a little as compared to 1999-the share of fuel and primary resource branches in the total production output will decrease by 0.6% (to 47.8%).

     In the agriculture, further production stabilization is forecast in 2000, which in-dicated in 1999. In the most favorable variant, total yield of grain is estimated to be 70M tons (102.9% to 1999). Sales of cattle and poultry for slaughter is fore-cast in amount of 102.9% to 1999, milk production 103.4%. This will be contrib-uted by measures of state support to poultry plants and stock-raising complexes (increase of assignments to strengthen fodder supplies, economic readjustment of high-tech enterprises).

     Gross agricultural output growth rate in 2000 will be about 2% according to the first scenario. More favorable dynamics of the above macroparameters is considered to be unlikely due to existing objective constraints:

      inertia of processes of structural economy changes, lagging with their implementation in 1999;

      insufficiency of resource potential (raw materials-especially those re-ceived from import; finance and credit and own funds of enterprises; in-vestment, especially new high-performance equipment; labor-top level and skilled specialists);

      high capital intensity of structural changes in the Russian economy, high specific weight of branches that were previously connected with defense products;

      insufficient effective demand of the population (real incomes of the popu-lation in 2000 will remain close to the 1999 level).

     The state's ability to stimulate effective demand of the population are signifi-cantly restricted by the burden of foreign and domestic debt service (3.5-4% of GDP annually). The state's abilities to perform low-inflation extension of money supply are also restricted.

     Economy growth in the several coming years will rely on favorable conditions for export-oriented businesses connected with the ruble devaluation that has oc-curred. However, due to macroeconomic constraints remaining in force in 2000, one shouldn't expect that growth to be very high (growth of export in 2000 in general and of that to non CIS countries is estimated not to exceed 2%). Only after the year 2000 the foreign market supply will be determined by competitive-ness growth of Russian enterprises' products and export structure diversification.

     The base for economy growth in general will be home demand expansion. But on the first stage in 2000, such expansion will take place largely by means of export substitution and non-capital-intensive production growth (by utilizing idle production facilities and partial renewal of the same). As soon as productive abilities form, also including interbranch effect, and demand potential expands, development rates of the Russian economy on its own base will increase after 2000.

     When developing macroeconomic parameters according to the second scenario, the following factors were taken into account that may complicate the economic situation in 2000:

      unsolved question of writing off and restructuring the state debt of the former USSR, unsettled negotiations on that matter do not allow to in-crease the state demand which weakens the prerequisites for economic growth;

      possible growth of constraints of budget and monetary policy in accor-dance with IMF requirements;

      instability of positive changes in the conjuncture of foreign markets prices, especially fuel prices.

     Besides that, restriction of home demand in its principal components especially powerful for this scenario are taken into account:

      probable investment demand slowdown (growth rate will be 99% to 1999 according to this scenario) and lower dynamics of foreign investments due to sociopolitical factors in the year of presidential elections;

      depressive state of consumer demand due to decrease of real wages which may last under the conditions of a relatively high "inflation back-ground": inflation rate will be about 35% in 2000 according to this sce-nario (or over 2.5% monthly in the average), which corresponds to the continuing low investment activity in the real sector.

     Subject to these factors, the GDP growth in 2000 according to the second sce-nario is estimated to be within 0.5%, which means de facto stagnation. The in-dustry output growth will be limited to 1% which is substantially less than the 1999 estimate even in an unfavorable variant. This stresses that the growth factors formed in 1999 and much related to ruble devaluation are exhausted.

     The second scenario parameters are quite likely. In any case, it appears that the real development of the Russian economy will go on a trajectory between the first and second variants.

     Economy Development till 2002

     In a mid-range view, a turn from decline to economic growth in the country's economy development may be fixed subject to a complex solution of problems in the spheres of budget and taxes, finance, banking and in the real sector of economy. The further development of market reforms will be combined with rein-forcement of the state's regulative functions.

     According to the first scenario, the GDP growth in 2001 and 2002 will be 4% and 5% respectively, the growth rate of investment into fixed assets from all fi-nancing sources-5 and 7%. The estimated GDP dynamics is mainly related to the extremely low investment activity in the preceding years and immeasurably higher economy's demand for investments. At the same time, chances are real for investment activation in those years.

     According to the first scenario, the annual growth rates of industry output in 2001 and 2002 will be 5% and 6% respectively.

     In the course of implementation of the industry policy in 2001-2002, it is ex-pected to intensify the export orientation. Those years will be characterized by development or import substitution processes and preparation for outputting products corresponding the current fifth technological model. The transition of the industry to manufacturing knowledge-intensive and competitive products aimed at industrial countries will be accelerated, as well as modern products designed for export into developing countries.

     Most expeditious growth rates in the forecast period will be in development of branches such as chemical and petrochemical industry, engineering and metal processing, light industry (about 120% and higher in 2001-2002). The share of these branches in the total volume of industrial output (when calculating by a sum of branches) will be about 32% in 2002 against 28.3% in 1998.

     The development dynamics of the group of branches including woodworking, timber, pulp and paper, oil processing industry, production of building materials and food industry will be from 112% to 118% during the two years. Their share in the total industrial output won't actually change and will amount to about 23% in 2002.

     The development of coal industry, ferrous and non-ferrous metallurgy, electric power production, oil extraction and gas industry will be influenced by structural shifts in the country's economy, demand and price limitations corresponding to that period, and measures taken to reduce the energy intensity of the GDP. The development rate of these branches if estimated in the range from 104% to 110% during the two years. The specific weight of this group will reduce and amount to 40% in 2002 against 43.6% in 1998.

     In general, the structure of industry production will improve due to the increase of processing branches' share. This will be determined by increase of invest-ment product output and expansion of nonfood consumer goods output.

     The reinforcement of positive processes in the economy will be contributed by an enterprise reform ensuring that the property is transferred to efficient owners interested in long-term development of the enterprises and in possession of necessary investment resources.

     The agricultural growth rate in 2001-2002 will reach (according to the first sce-nario) 3% and 4% respectively.

     Important measures in development of the agricultural complex may be:

      beginning of realization of the Program of Optimization of Price Relations between the Products of Agriculture and Other Economy Branches start-ing from the 2nd semester of 1999;

      efficiency improvement of utilization of budget funds applied for leasing operations performed by leasing companies in which the controlling stock is under state management;

      introduction of protection measures in the foreign trade and customs tariff policy of state regulation of oil stock export;

      practice of supporting stock-raising complexes and poultry plants bringing payoff within the annual production cycle by increasing the assignments to reinforce the fodder supplies in order to reduce meat import.

     In 2001-2002, the reduction of the "inflation background" will take place in the economy of Russia, yet rather slowly. Even according to the first scenario, the inflation rate will be in 2001-2002 12% and 10% respectively, which in fact cor-responds to the inflation rate in 1997. This is connected with the necessity in in-dex the populations incomes, to finance investments into the fixed assets, also partially from emission sources, by structural shifts in the economy characteristic for the economic growth. In the mid-range prospect in the average, it will be ex-pedient to pursue a rather moderate fiscal policy, which on the one hand wouldn't suppress investment into the real sector of economy, and support structural processes on the other hand.

     By 2001, the restructuring of the banking system will be mainly completed.

     In the banking sphere, high presence of the state will remain. It is connected with the fact that the Russian economy will signficantly lack financial resources for adequate restructuring and recapitalization of the banking sector.

     It is worth noting that in the period before the 1998 August crisis Russian com-mercial banks were de facto oligopolist and-at the same time-rather expen-sive and inefficient mediators on the domestic finance market.

     The detachment of many credit institution s from the real sector of economy, dim-sighted credit policy, unwillingness to grant credits to retail borrowers, in-cluding small businesses, couldn't but impact both the economic situation in general and the liquidity of assets of the banking system. Involving money from the population in order to fill the working assets of enter-prises, first of all agriculture, food and light industry, is a task that can't be solved without strengthening the institutional structure of Russia's credit system.

     The mid-range forecast of Russia's economy development (according to the first scenario) presumes that in 1999-2000 the restructuring of Russian foreign debt will be made, the budget's burden of foreign debt service won't exceed US$7 billion annually. Along with an active positive foreign-trade balance of Russia, it will allow to solve some most important problems:

      to form large enough gold and currency reserves of the Bank of Russia and, on that basis, to pursue an efficient policy of exchange rate regula-tion;

      to concentrate currency assets for financing priority economy branches via the Development Budget;

      to create prerequisites for transfer of currency savings into organized ru-ble savings in safest banks. Also by means of guarantees of Agency of Credit and Investment Risk Insurance being now organized, authorized foreign banks, etc.;

      to partially solve the problem of steady capital outflow from Russia (estimated US$19-20 billion annually). The repatriation may be per-formed through partial capital amnesty, other measures of legislation modification.

     Preserving product efficiency and competitiveness of export-oriented branches will require that a balanced policy in respect to the ruble exchange rate in order to preserve acceptable operation conditions in such branches. This would allow:

      to preserve monetary efficiency of export;

      to stabilize efficiency of import to Russia and, under conditions of using selective tax preferences for import, to purposefully regulate import vol-umes of both production and consumer designation.

     In 2001-2002, moderate growth of foreign trade volume of Russia and gradual improvement of its structure is forecast.

     Taking into account the typology of foreign markets, there will be acceleration in the transition of the industry to the production of mainly knowledge-intensive products oriented at markets of developed industrial countries, as well as up-to-date products designed for export into developing countries.

     The main place in purchase in non CIS countries will be occupied by engineer-ing products, a substantial share of foodstuffs, medicine and medicaments will remain.

     The export growth rates in 2001-2002 will (according to the first forecast sce-nario) amount to 3.5% and 4% respectively against 2% in 2000 and reach the volume of US$ 77.5 billion. The import dynamics is forecast to reach 4% and 5% in 2001 and 2002 respectively against 2% in 2000. Its absolute volume will be US$51.7 billion in 2002. The positive foreign trade balance due to moderate im-port dynamics will grow, and its annual volumes in 2000-2002 will be US$24.4, 25 and 25.8 billion respectively.

     The parameters of the second forecast scenario for 2001-2002 are more modest than those of the first scenario (see Table 2). The GDP growth rates in 2001 and 2002 according to this scenario will be 3% and 4% respectively, indus-try output 3% and 4%, agriculture 1% and 2%.

     According to the second scenario, the inflation rates are higher: 20% in 2001 and 15% in 2002.

     Under conditions of a higher "inflation background" and higher interest rates, investing into the real sector will go with some lower dynamics. The amount of investments into the fixed assets according to this variant are forecast to be 3% and 5% in 2001 and 2002 respectively.

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