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The sharp growth of the prices on theimported cotton, wool, and cotton thread was one of the factors of theaggravation of the recession in the textile industry. The 3.3 to3.5‑fold growth ofthe prices on the imported cotton fiber resulted in the 2.5‑fold growth of the prices on thecotton products and the problems with the sale of the finished goods. As aresult, certain enterprises oriented to the domestic market stopped. Thesituation of the enterprises exporting the fabrics was a little better, buttheir number does not exceed 20% of the total in the cotton industry and theydo not determine the overall situation. The growth of the prices of theimported wool and drop of production of the domestic wool feedstock had thenegative effect on the wool industry. The unfavorable weather conditions led tothe 2‑fold reduction,in 1998, of the flax fiber production compared with 1997. As a result, themanufacture of the flax and hemp jute fabrics dropped by almost34%.

The growth of prices on the naturalfeedstock resulted in the growth of the demand for the chemical fibers andthreads; this made it possible to conserve the production in this branch of thechemical industry practically at the 1997 level.

However, in whole, more than 64% of thelight industry enterprises were profitless as of 1аDecemberа1998. Manyenterprises had unnecessary equipment and workers resulting in the excessiveproduction expenditures.

The private enterprises and the ones withforeign capital favored the restructuring of the light industry and its gradualadaptation to the market situation. From the middle of 1998, the clothingindustry saw the revival remaining effective up to today. Occupying a certainniche in the consumer market, the products of the clothing industry begancompeting with success with the similar imported articles. This ensures thework places in the clothing industry and the associated branches of the lightand chemical industries.

In 1998, the positive trends that hadappeared in 1997 in the chemical and petrochemical industries could not beintensified. From March 1998, the reduction of the monthly production began; itwas the most intensive in June to September. The production of most of the mostimportant products of the chemical industry reduced. The production of themineral fertilizers reduced by 2.5% compared with 1997. Their export exceeded80% of the total production volume and exceeded by almost 3% the export of1997. The production of the synthetic rubber reduced by 11.8% compared with1997 due to the reduction of the export supplies of certain kinds of the rubberresulting from the non-competitiveness of the latter. In addition, thesituation with the feedstock supply aggravated because the long pause in thereproduction of the fixed capital in the associated branches had resulted inthe shifts of the in- and inter-branch proportions.

With the reducing demand in the domesticmarket for most of the domestic chemical industry products, the export holdsback the production drop in the industry and gives the hard currency incomerequired to purchase the feedstock and materials. Almost a third of thechemical industry products is exported. At the same time, the drop of the worldfeedstock prices, the anti-dumping sanctions by the Western countries, and thegrowth of the export potential in China and Middle-East countries pushing theRussian chemical products exporters away from the traditional markets, theexport supplies of the nitrogen fertilizers, methanol, ammonium, and syntheticrubber reduced. As a result, the estimated volume of the hard currency incomewas about 91% of the level of 1997.

Due to the growth of the exchange rate ofthe USаDollar, the import of the household chemical products, plastic articles,paints, and other materials reduced. This favored the growth of the demand forthe domestic products and a certain revival of the relevant production.However, this also resulted in the worsening of the situations of the entitieswhose production processes require the imported feedstock.

The financial situation in the chemicalindustry remained very complicated. As of 1аDecemberа1998, 49.7% of theenterprises were profitless. The accounts payable exceeded the accountsreceivable almost 2‑fold; the coverage factor characterizing the solvency of theentities reduced, during 1998, from 92.3% to 83.3%.

The production profitability level of thechemical industry enterprises stayed low: it was minus 0.6% in the firstquarter-year, 1% in the second quarter-year, and 4.1% in the thirdquarter-year. As a result, the estimated annual profitability was 2% to 2.5%compared with the 4.6% in 1997.

In the forestry and woodworking complex, thetotal production volume of 1998 was close to that of 1997. Under the reductionof the solvent demand of the domestic market, the production became moredependent upon the foreign market situation. The export volume of the wood andpaper products (round timber, veneer, paper, commercial cellulose, and packingcardboard) somehow grew. In the structure of the export, the raw timber (31%)and sawn timber (18%) prevailed still. In the overall export volume of the woodand paper products, the specific share of the deep treatment one was 38% (26%for the paper and cardboard and 12% for the commercial cellulose). In 1998,there were the cases of suspension of the export supplies due to thesuspensions of the payments, growth of the expenditures on the feedstock andtransport, and drop of the prices on the export products. As a result, thetotal hard currency income decreased, according to the estimates, by 5%compared with 1997.

The intensification of the decay in theextracting sector of the economy resulted from the drop of demand in thedomestic market. In 1998, as compared with the preceding year, the sales forthe production and operation needs reduced by 7.5% for the crude oil, by 2.5%for the natural gas, and by 0.7% for the coal. With the reduction of thedomestic market demand from the basic mechanical engineering, the sale of themetallurgical products reduced.

The drops of the production by 8.1% in theferrous metallurgy and by 5% in the non-ferrous metallurgy, compared with thepreceding year, were due, mainly, to the decrease of the export supplies ofcertain products. Besides, the solvent demand from the mechanical engineering,fuel and energy, and investment complexes reduced. During the year, thedomestic market sales reduced by 4% for the finished roll of the ferrous metalsand by 20% for the steel pipes. In 1998, the demand of the domestic market forthe main non-ferrous metals remained, practically, at the level of thepreceding year.

In 1998, the export stayed the maindirection of sale of the most important non-ferrous metals. Its share in theproduction of the industry exceeded 80%.

The drop of the Ruble exchange rate resultedin the temporary improvement of the financial situations of the export-orientedenterprises of the metallurgical complex, growth of the financial profitabilityof their products, and replenishment of their circulating capital; however, inwhole, the situation remained unsatisfactory.

As of 1аDecemberа1998, the losses of theferrous metallurgy enterprises reached Rbl.а3.5аbillion; the accounts payableexceeded the accounts receivable 1.9‑fold. In the non-ferrousmetallurgy, the losses were Rbl.а3.1аbillion; over 60% of the enterprises wereprofitless.

The production and financial results of theindustry were affected by such internal factors as the growth of the interestrates and expenditures on the rail transportation of the export cargoes. Thefinancial and economic crisis resulted in the slowdown of the settlementsbetween enterprises, worsened circulation of the capital, and strengthening ofthe barter (the latter has reached 70% of the sold products). All these had thenegative effect on the production.

The metallurgical enterprises did not havethe money to update and reconstruct their facilities, to implement thestate-of-the-art production processes. At most enterprises, the wear and tearof the fixed assets exceeded 50% to 70%, resulting from the worsenedcompetitivenes of the products and irreparable damage to theenvironment.

When evaluating the outlooks of theevolution of the metallurgical complex, the feedstock base issues have beengaining priority. The low rates of increase of the prospected reserves and thefact that the putting into operation of the facilities extracting thenon-ferrous ores has remained behind their removal from operation may result inthe sharp decline of production in this branch in the nearest years. Thealuminum manufacturers were provided with the domestic feedstock at 35% to 40%,and the remaining feedstock, mainly alumina, was purchased in the foreignmarket.

The share of the fuel and feedstockproduction in the industrial production structure has continuedgrowing.

Fig. 2.3

Source: Calculated based on the data of theRussian State Committee for statistics (Goskomstat).

According to the pre-estimates, in 1998, theextraction and production of the primary fuel and energy resources grew by 0.7%compared with the preceding year, due to the growth of the extraction of thenatural gas and production of the electric energy by the hydro-electric powerplants.

The demand of the domestic market for thefuel and energy resources was fully satisfied; with all this, over 45% of theextracted crude oil, 33% of the extracted natural gas, and 28% of the petroleumproducts were exported.

In 1998, for the first time during the yearsof the reforms, the growth of the prices on the most important energy resourcesstopped and they began significantly decreasing. Thus, in December 1998, ascompared with the relevant period of 1997, the prices of the producers reduced:by 9.8% for the crude oil, by 5.9% for the electric energy, and by 8.1% for thecoking coal. The average price of the gas, including the cost of itstransportation, stayed the same, while that of the energy coal grew by2.2%.

Up to August 1998, the prices of the mainoil processing products were significantly reducing, as well. However, theinflation processes, having become more severe due to the financial crisis,resulted, to the end of the year, in the growth of the prices by 29.5% on theautomobile gasoline, by 7.8% on the diesel fuel, and by 3.4% on the fueloil.

In 1998, the production of the electricenergy was 826аbillionаkWh which was close to the 1997 level. The index ofphysical production volume in the sector, including the heat energy production,reduced by 2.5%.

(The main tendencies of the oil and gascomplex and food industry evolution will be discussed below).

Formation of GDP by Incomes

The decline of the business activity in thenational economy has resulted in the decrease of the real mass of the profitreceived by the large and medium enterprises and the growing differentiation ofthe branches by the financial and economic indexes. In 1998, the level ofproduction profitability in the industries and production infrastructurecontinued reducing. In the first half of 1998, the financial balance of thelarge and medium enterprises and organizations was Rbl.а55.1аbillion, or 70.9%of the level of the preceding year.

In the second half of 1998, the indexes offinancial activity worsened in all the branches of the real sector. As of theresults of the first eleven months of 1998, the profit of the large and mediumenterprises was Rbl.а209аbillion. As compared with 1997, the share of theprofitless enterprises grew up to 48.3% (50% in the industry) and their lossesreached Rbl.а187.5аbillion. In January through November 1998, the balanceprofit of the large and medium enterprises reduced by 84.6% compared with therelevant period of 1997, including by 84.9% in the industry, by 46.3% in theconstruction, and by 9.9% in the transport. All the branches of the industry,except the fuel and energy complex, medical industry, and polygraphy, wereprofitless. In the wood industry complex, light industry, non-ferrousmetallurgy, microbiological industry, industry of construction materials, andfuel industry, the specific share of the profitless enterprises exceeds theaverage one.

The certain revival of the production notedin October through November 1998 was due to the partial restoration of thesolvency of the banks, reduced amplitude of the variations of the exchange rateof the Ruble, and reduction of its real exchange rate. In Novemberа1998, forthe first time since the August crisis, the large and medium enterprises andorganizations of all the branches of economy (not taking into account theagrarian economy, crediting, and insurance organizations) received the balanceprofit (profit minus losses) of Rbl.а14.6аbillion, including theRbl.а6.3аbillion in the industry. The positive financial result of theindustrial enterprises is partially explained by the slowdown of the recessionrates and redirection of the consumer demand to the domestic goods due to thesignificant reduction of the supplies of and growth of the prices on theimported goods.

The 1998 financial situations of differentindustries differed. In the second half of 1998, compared with the second halfof 1997, the profits grew in the food industry and in the exporting industries,i.e., oil and gas extraction, metallurgical, and chemical industries. Thedevaluation of the national currency resulted in a certain growth ofprofitability of the export because the decrease of the Ruble exchange rate waslarger than the reduction of the world prices on the main feedstock products.At the same time, the devaluation of the Ruble resulted in the growth of theexpenditures on the imported feedstock and materials and on thetransportation.

The communications observed the growth ofthe profit in the first half of 1998, compared with the first half of 1997, byalmost 2.6%. However, after the crisis, the profitability sharply dropped, andfor the first eleven months, the balance result was 55.9% of the level of thepreceding year.

The collapse of the retail turnover in thefourth quarter of 1998 and the growth of the number of the profitless entitiesworsened the financial results. The year in the trade ended with the lossesexceeding Rbl.а14.4аbillion.

The total estimated balance profit of 1998of the large and medium enterprises and organizations of all the branches ofeconomy (not taking into account the rural economy, crediting, and insuranceorganizations) was Rbl.а60аbillion, or 73% of the level of the precedingyear.

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