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Section 3. The real sector

3.1. Trends and Factors Effecting Final Demand

3.1.1. GDP: Trends and Structure of Production and Consumption

The period between 1999 and 2003 was represented by dynamic development in the majority of economic sectors and industries. The economy was growing against the backgrounds of a favorable external economic environment and stable internal social and political situation. Over the last five years, the GDP grew up to 37,5% to reach in 2003 almost 80% of the 1990 parameters as against the maximum decline of 57,7% in 1998. The economic recovery period was represented by an outstripping growth rate of investments over production and consumption. The scale of capital investments at the same period grew by 1,55 in the economy as a whole with final consumption increasing by 26,6%. The growth in investment demand had a most material impact upon the behaviour of structural changes in the produced and consumed GDP.

Table 1

Basic Macroeconomic Parameters between
1991 and 2003, as % against previous year

	Annual average	Against previous year
1991–1995	1996–2000	2001–2003	1999	2000	2001	2002	2003
Gross domestic product	90,9	101,6	105,4	106,4	110,0	105,1	104,7	107,3
Actual final consumption of households	98,6	100,1	108,3	97,6	105,9	108,6	107,9	108,9
Capital investments	78,0	91,4	107,8	105,3	117,4	108,7	102,6	112,5
Industrial output	87	103	105,1	111,0	111,9	104,9	103,7	107,0
Agricultural production	92,3	98,7	103,5	104,1	107,7	107,5	101,7	101,5
Freight turnover	90,3	99,7	105,4	105,8	104,8	103,2	105,6	107,4
Volume of communication services	-	-	119,8	133,1	113,8	119,1	115,6	127,5
Retail turnover	98,2	100,9	109,3	93,9	108,8	110,7	109,1	108,0
Fee-based services for population	65,4	102,3	102,8	107,0	105,0	102,8	100,4	105,1
Foreign trade turnover	108,2	100,9	112,4	86,7	129,7	105,4	108,1	125,3
Real disposable income	92,4	96,5	110,6	86,4	109,1	108,5	108,8	114,5
Real wages	87,6	98,2	115,5	78,0	121,0	119,9	116,6	110,4
Annual average number of people employed in economy	97,4	99,4	100,3	100,5	100,6	100,6	101,0	99,2
Unemployment strength ( at year-end )		109,7	97,8	102	77	90,0	98,0	106,0

Source: the Russian State Statistics Committee (Goskomstat).

Comparative analysis of annual movement of macroeconomic parameters reveals significant fluctuations in rates by economic sector under specific factors and conditions in a specific period. Concurrent growth in internal and external demand was responsible for a brand new element in recovery growth of the Russian economy between 1999 and 2003.

At the initial stage ( between 1999 and 2000 ) of post-devaluation development, the GDP average annual rate gained 8,5% under the conditions of dominating intensive development of the internal market. This trend was caused by almost doubled reduction of imports in 1999 as against the pre-crisis figures in 1997, as well as а boost in business activity of Russian manufacturers. The internal market environment was drastically changed as businesses took a new course aimed at engaging competitive capacities and developing production that could replace imported goods. A share of domestic products in retail turnover was increased by 8 percentage points, with decreasing imports to 40% over the first two years after post-devaluation development. In 2000, internal demand gained its maximum during a period of economic recovery between 1999 and 2003.

A fairly favorable environment in global markets of fuel resources and raw materials had a positive impact upon economic growth since the 2nd quarter of 1999. A cumulative effect of increasing production in the export-oriented sector of economy was represented not only by accelerated rate in development of allied industries, but also specified conditions and factors of development. In 1999, a long-lasting diminution in labor demand was noted to be stopped. Annual average quantity of people employed in economy was increased from 63,8 ml people in 1998 to 64,3 ml people in 2000 and 65,4 ml people in 2002, while the annual average quantity of unemployed people was reduced from 8,9 ml people tо 6,7 ml and 6,15 ml people correspondingly. A positive trend in capital investment was recorded for the first time from the wedge of reforms in 1994. Since 2000, the real income of the population, real wages and real amount of granted pensions began to grow intensively, which governed the recovery of final consumption of households in 2001 to reach the level of 1997.

Figure 1

Rate of Increase in Internal and External Demand between 1992 and 2003,
as % against previous year

A distinguishing feature of behavior and structural changes of the economy from the end of 1999 and at the first half of 2001 was enlargement of the internal marked against the backgrounds of a dynamic growth in consumption and investment demand.

The growing impact of external factors upon the development pattern of the Russian economy was noted from the second half of 2001 till the 4th quarter of 2002 and was governed by a reserved external demand and the existing prices in the global markets of raw materials and product markets. In addition, it is this period that the decaying wave of the effect from devaluated ruble occurred in. It should be noted that throughout the entire period between 2001 and 2002 a shrinking demand in the internal market was not compensated by expansion of production in the export-oriented sector, and eventually resulted in growth retardation to the minimum level over the last five years. The average annual growth rate of GDP between 2001 and 2002 accounted for 104,5%. However, even with fairly substantial fluctuations in annual and quarterly growth rates by industry, a contribution of the internal demand to the GDP growth in the period between 2001 and 2002 remained at the level 2000 which proved more favorable.

Positive changes in the global market’s environment had a stimulating effect on production and economic growth structure in 2003. With an increase in the average price of Russian export by approximately 10%, the price of energy sources grew by 20%, ferrous metals by 16%, aluminum by 5%, and nickel by 36%. The price rise was supported by a strong demand for fuel and raw materials. The gain in exports volume in value terms, according to the data from the Bank of Russia, was achieved in equal proportion by physical increase in volume and price factor. The Russian volume of exports, according to the estimates of the Ministry of Economic Development, in 2003 accounted for 135,4 bln US dollars and was increased by 26,2% as against the previous year.

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