Source: Russian State Committee forstatistics (Goskomstat).

Fig. 2.1

Before the market reforms, the Russianeconomy was characterized by the disfigured system of the interaction betweenthe financial sphere and the real sector of economy. Regretfully, the extremelyslow rates of restructuring of the economy and the absence of the efficientgovernmental investment and industrial policy have not allowed to solve thisproblem of the balanced development of the financial and real sectors of theeconomy up to today. The strict limiting financial policy has led to thelarge-scale practical use of the system of the non-money settlements betweenenterprises. Due to these circumstances, the financial crisis did not have avisible effect on the dynamic of the industrial production at the first stagesof its development. In January thtough June 1998, every second region of theRussian Federation observed the growth of the industrial production, comparedwith the relevant period of the preceding year. However, this trend wasunstable, and, in the first half-year, the industry showed the indications ofthe gradual slowdown of the growth rates. From the beginning of 1998, theenterprises began feeling the growing effect of the demand limitations. Thesituation in the industry was worsening also due to the changes of theconjuncture of the world markets of the energy media and metals.

In 1997, for the first time from thebeginning of the reforms, the industry saw the positive dynamic in the sectorof the investment and consumer goods. In 1998, the decline in the investmentcomplex renewed; hence, the reduction of production in the industry ofconstruction materials and in the mechanical engineering.

Fig. 2.2

The share of the construction in the GDPreduced by 0.7 percentage points, compared with the preceding year. The volumeof the construction works was 92.5% of the level of the preceding year; withthis, the main wave of curtail was seen in the fourth quarter of 1998. Thereduction of the scales of works was accompanied by the decline of the demandfor the construction materials. It is interesting to note that the recession inthe industry was seen on the background of the production restructuring. Thedrop of the demand for the precast concrete articles and articles for theindustrial construction was compensated by the growth of the demand for thewall materials and cement; the latter was due to the implementation of the newconstruction processes. As in 1997, the demand for the ceramic articles,roofing materials, and articles of polymeric raw materials continued growing.The state-of-the-art high quality construction materials were manufactured bymore than 30 new production entities. The fact that certain enterprises hadbegan participating in the different structures of the corporate type withparticipation of the banking and foreign capital had a certain positive effecton the normalization of the situations of such entities.

The dynamic and structure of the productionin the mechanical engineering accumulate the effect of the factors determiningthe situations of the financial, real, and consumer sectors of economy. Themechanical engineering reacted on the financial crisis by the marked reductionof production in all the sub-branches. In 1998, the volume of production in themechanical engineering reduced by 7.5%, while the 1997 growth was3.5%.

The positive dynamic in the mechanicalengineering complex stayed effective only during the first four months of 1998.In May, the recession began that initiated the reduction of both the domesticdemand and export. The volume of the mechanical engineering export reduced by11.2% compared with 1997, due to the continuing financial crisis in thecountries importing the Russian mechanical engineering products. The export tothe outside CIS reduced 2.7‑fold for the forging equipment, by 30% for the road constructionequipment, and by 3% for the metal cutting machinery. The export of the Russianmechanical engineering products to the CIS countries dropped by36.3%.

While in 1997 the revival of the industrialproduction had been connected with the restitution of the positive dynamic inthe automobile construction, in 1998, the situation differed: the production ofthe automobile construction reduced by 11.5% compared with 1997. The industryfaced the problem of sale and growth of the overproduction crisis. Theautomobiles manufacture forms almost a third of the gross production of themechanical engineering, and, of course, the new situation has a destabilizingeffect on the trends of evolution of the mechanical engineering complex andindustry in whole.

In 1998, after the drop of the productionprofitability down to 5.7% (against the 6.96% in 1997), the share of theprofitless mechanical engineering enterprises grew. It reached 47.9% (againstthe 44.6% in 1997). As of 1аDecemberа1998, the accounts payable exceeded theaccounts receivable almost 2‑fold; the delayed payments to the budget and the state non-budgetfunds grew, as well.

The production facilities of the industrywere used within the limits 18% to 21%, except for the automobiles manufacturewhere the levels of use of the facilities were 60% for the buses and 85% forthe passenger cars. The elimination of the facilities continued, mainly in thelarge-batch production (metal-cutting equipment, electric motors, and cranes)due to writing off the worn and torn equipment. The shortage of the money ledto the lack of renewal of the fixed assets, the implementation of the energyand resources saving processes did not go on.

In the first half of 1998, the production ofthe defense industry grew by 3.9% compared with the relevant period of thepreceding year. However, in the third quarter-year, the decline began; inwhole, in 1998, the manufacture of the civil purpose articles in the defenseindustry complex was 92.4% of the level of the preceding year, while itsspecific share in the overall production of the complex reduced to 56.5%compared with the 59.4% of 1997.

Due to the low solvent demand of thecustomers, lack of the own circulating assets, limited possibilities ofmobilization of the credit resources, badly developed leasing relationships,and shortage of the budget financing of the conversion programs, the financialand economic situation of the defense industry entities remained difficult. Theaccounts payable exceeded the accounts receivable more than 2‑fold. This situation resulted inthe insolvency of about 400аenterprises (as of 1аJanuaryа1999) and larger useof the barter; these worsen the situation with the non-payments of the laborremuneration and aggravate the social tension.

In 1998, the defense complex conserved thetrend (formed in 1997) to the growth of the production volumes of the entitieswhose civil products are competitive and have the demand. Thus, in 1997, theproduction volumes of the medical equipment grew by 20%. The growth of themedical equipment manufacture was due to the high quality of the equipment andthe prices significantly lower than the ones on the similar importedarticles.

In the aviation industry, the productiongrew by 1.3% due to mastering by a series of enterprises of the up-to-dateaircraft (airplanes of the TU‑204, IL‑96 types), growth of their export, and grown volume of repair andmaintenance of the earlier manufactured aircraft. In whole, in 1998, 14аlargecivil airplanes and 42 helicopters were manufactured; of them 7 airplanes and12 helicopters were intended for export.

The problems with increasing the manufactureof the civil aviation equipment were due, mainly, to the absence in Russia ofthe leasing supplies system: the deployment of such system requires thesignificant initial investments. Some of the aircraft constructors whenexporting the aircraft solved the problem of the financing using theinternational financial leasing. Thus, SiroccoAerospace (Egypt) was the first foreign leasingcompany having ordered the supply of five TU‑204‑120 passenger planes (from theUlianovsk Aircraft Industry Complex Aviastar) and having made the option fortwenty four more aircraft of this type.

In whole for the defense complex, in 1998,the export of the civil products was US$а810аmillion (132.6% of the 1997level). The export supplies were made by 331 enterprise of the defense industryto 80 countries of the world.

In 1998, the production continued to grow inthe electrical engineering, instrument making, and communication meansindustries. Despite the low specific shares of the above industries in thestructure of the mechanical engineering complex, they have an active influenceon the evolution of the competition in the market of the machinery andequipment.

The manufacture of the production equipmentfor the enterprises of the light industry and processing branches of theagro-industrial complex reduced by 17.5% and 5.0% respectively compared withthe relevant period of the preceding year. The use of the facilitiesmanufacturing the production equipment for the fuel and energy complex wasabout 40%; its manufacture grew by only 2.7% from the 1997 level. Theproduction of the non-food consumer goods reduced by 21.4% from the level of1997.

In 1998, the production in the civilshipbuilding reduced by 17.3% from the 1997 level. The further decline of thealready low solvency of the customers determined the delays in the vesselsmanufacture. As of today, the construction of almost 30 ships has beensuspended due to the non-payments from the customers.

In 1998, the dynamic of production of theconsumer goods was predetermined by the growth of the prices and reduction ofthe demand in the domestic market. The greatest effect of the crisis was on theproduction of the long life consumer goods and sophisticated home appliances.According to the preliminary data, in 1998, the overall volume of production ofthe consumer goods reduced by 9% compared with 1997. The entities manufacturingthe goods under the licenses of the foreign companies and using the importedcomponents and materials reduced significantly the production volumes; someeven stopped their manufacture.

In the light industry, in 1998, the overallproduction volume decreased by 11.5% compared with the preceding year. Withthis, during the year, its dynamic underwent significant changes. In the firsthalf-year, the production remained at the level of the relevant period of 1997.From the beginning of the second half of the year, the decline of the overallproduction volume was growing from 14.5% in July to 30% in October throughDecember.