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Figure 7. Dynamics of the Official RUR - US$ Exchange Rate in 31,31,31,31,31,31,31,31,31,31,31,31,31,31,31,30,30,30,30,30,30,30,30,30,30,30,30,30,30,30,30,30,30,Figure 8. Dynamics of the Euro - Dollar Exchange Rate in World Currency Markets 1,1,1,0,0,0,0,0,0,0,0,0,0,0,0,0,0,0,In September The Euro / US$ exchange rate was in the range 0.97-0.99 US$ / Euro. The fluctuations were caused by occurrences in the political life, including the situation around Iraq. A slight lowering of the Euro рублей/доллар 01.01.16.01.26.01.07.02.19.02.02.03.15.03.27.03.06.04.18.04.28.04.16.05.25.05.06.06.19.06.29.06.11.07.23.07.02.08.14.08.24.08.05.09.17.09.27.09.долларов/евро 01.01.08.01.15.01.22.01.29.01.05.02.12.02.19.02.26.02.05.03.12.03.19.03.26.03.02.04.09.04.16.04.23.04.30.04.07.05.14.05.21.05.28.05.04.06.11.06.18.06.25.06.02.07.09.07.16.07.23.07.30.07.06.08.13.08.20.08.27.08.03 09 in the end of September is also related to market participants' dissatisfaction with election results in Germany.

At the end of the month the official RUR / Euro exchange rate slightly decreased from 31.0938 RUR / Euro on 31 August 2002 to 30.9082 RUR / Euro on 28 September 2002, i.e. by 0.6 percent.

FIGURE 9. Dynamics of the Official Euro Exchange Rate in 2002.

32,31,31,30,30,29,29,28,28,27,27,26,26,Table Financial Market Indicators Month April May June July August* Monthly inflation rate 1,7% 0,5% 0,7% 0,1% 0,1% Inflation rate annualized on the basis of this 22,42% 6,17% 8,7% 1,2% 1,2% month's trend CB RF refinancing rate 23% 23% 23% 21% 21% Annualized yield to maturity on OFZ issues 15,61% 14,86% 14,42% 14,45% 14.8% Volume of trading in the secondary GKO-OFZ 14,98 12,99 9.34 6,95 market for the month (RUR billion) Yield to maturity on Minfin bonds at the end of the month (% p.a.) 4th tranche 6,05% 6,29% 6,27% 5,6% 5,58% 5th tranche 9,77% 10,43% 11,19% 10,88% 10,19% 6th tranche 9,02% 9,75% 10,3% 9,52% 8,84% 7th tranche 10,11% 10,65% 11,03% 11,05% 10,45% 8th tranche 9,09% 9,55% 9,72% 9,81% 9,3% INSTAR-MIACR rate (% p.a.) on interbank loans at the end of the month:

Overnight 4,09% 14,81% 29,06% 5,74% 10% One week 7,08% 22,26% 8,08% 8,25% 18% Official RUR / US$ exchange rate at the end of 31,3071 31,4471 31,4401 31,5673 31,the month Official RUR / Euro exchange rate at the end of 29,3254 31,0792 30,8019 31,0938 30,the month Average annualized growth in RUR / US$ 0,36% 0,45% -0,02% 0,4% 0,2% exchange rate Average annualized growth in RUR / Euro 4,19% 6,81% -0,89% 0,72% -0,6% exchange rate Volume of trading at the stock market in the 454,1 344,3 407 276,04 RTS for the month (US$ million) Value of RTS Index at the end of the month 391,26 353,79 326,23 332.9 342.Change in value of RTS Index during the month 1,34% -9,58% -9,22% 2,7% 2.77% (%) * Estimates D. Levchenko, D. Skripkin рублей/евро 01.01.15.01.24.01.02.02.13.02.22.02.06.03.16.03.27.03.05.04.16.04.25.04.08.05.19.05.29.05.07.06.19.06.28.06.09.07.18.07.27.07.07.08.16.08.27.08.05.09.14.09.25.09.Debt burden on the Federal budget in According to the draft budget for 2003, the primary proficit shall made about Rub. 350 billion, i.e. 2.68 % of GDP. At the same time, the aggregate expenditures for the servicing of the RF public debt will make Rub.

277.5 billion (2.13 % of GDP), including payments pertaining to the external debt (Rub. 220 billion, or US $ 6.5 billion). Accordingly, next year, the net budgetary proficit will be at or below Rub. 72.2 billion, or 0.% of GDP. At the same time, payments pertaining to the principal external debt of the RF are targeted at US $ 10.8 billion, or about Rub. 367.2 billion (2.81 % of GDP). It is expected that the balance of operations (borrowings minus repayment) related to the internal debt will be positive and make Rub. 24.2 billion.

Therefore, in order to finance payments related to the external debt in full, the RF Finance Ministry will have to use up to Rub. 132 billion (about US $ 3.9 billion) from the carryover balance of the RF government accounts with the Bank of Russia and the financial reserve alongside with the planned borrowings on the external market (up to US $ 1.93 billion), proceeds from privatization and sales of a portion of the state reserve of precious metals and precious stones. For the information about the utilization of proficit and financing of the federal budget in 2003, see the aggregate table below.

Rub. billion Rub. billion Primary proficit 349, Expenditures for debt servicing 277,Including internal 57, external (US $ 6.5 billion) 220,Proficit 72, Repayment of debt 505, Including external (US $ 10.8 billion) 367, Internal 138,Borrowings 301,Including state CB 162, External borrowing ($1.93 bil.) 65, Privatization 53,Balance of operations with precious metals and precious stones Lack of funds In the course of analysis of the draft budget, two important aspects characterizing the situation of expenditures related to the RF external debt in 2003 may be singled out:

1. In spite of the measures taken in order to diminish the amount of aggregate payments related to the servicing and repayment of the external debt in 2003 (by US $ 2 to 3 billion in comparison with the schedule of payments drawn in 2000 and 2001), the resulting amount (US $ 17.3 billion) is maximal. These payments will result in the utilization of all government financial resources accumulated over the periods of favorable external economic situation. Therefore, in the case the unfavorable scenario of the development of the RussiaТs economy will prove true (deceleration of growth rates, a significant decline in oil prices, and related decrease in budgetary revenues), the problem of external debt burden may again become the problem of paramount importance.

2. The annual yields (15 % to 17 %) of new tranches of medium and long term (3 to 5 years) Ruble bonds planned by the RF Finance ministry seem to be set too high in comparison with the current yields of Russian eurobonds of similar maturity (8 % to 8.5 % for bonds maturing in 2007 and 2010). Therefore, in the case the favorable situation of RussiaТs debt obligations on world financial markets persists, it looks feasible to issue additional eurobonds of similar maturity in stead of new issues of GKO - OFZ. Since the government expects that over a few next years inflation rates decrease to 8 % -- 10 %, and, therefore, the rates of nominal Ruble depreciation will slow down (most probably to 3 % -- 5 % a year in the case the current rates of real Ruble appreciation persist), the planned cost of borrowings on the internal market (in US $ terms) will be higher than rates related to external debt obligations.

S. Drobyshevsky Investment in the Real Sector In January through August of 2002, the positive dynamics of investment in the real sector persisted. The amount of investment in fixed assets from all sources of financing made Rub. 910.2 billion, what is by 2.4 % above the level registered in January through August of 2001. As compared with the figures observed in the first six months of 2001, the share of investment in fixed assets in GDP decreased by 2.0 p. p. and made 12.%. In the first half-year of 2002, a growth in investment was registered in the Central, Northwest, Uralski, and Far East federal okrugs.

Fig. 1 Changes in the dynamics of investment in fixed assets as broken down by Federal okrugs in the first 6 months of 2002 and 2001, in % of the first 6 months of the preceding year --2001 The lesser intensity of investment inflows in the real sector of the economy in 2002 was observed at the background of changes in the sectoral structure of investment. The share of investment in fixed assets of manufacturing industries has stabilized at the level observed in the preceding year. The changes in proportions of investment across the sectors of the economy was practically completely determined by a considerable decrease of investment in transport. As compared with the first six months of 2001, the share of investment for development of transport decreased by 4.1 p. p., while the share of investment expenditures for communications grew by 1.2 p. p. and for housing construction - by 1.8 p. p.

This year, the changes in the structure of investment across industries occurs at the background of decreasing share of fuel complex and food industry. Fuel industry maintains its dominating position in the structure of investment, its share makes 51.2 % of the total investment in industry; at the same time, more than 1/3 of investment flows in oil extracting industry. Taking into account the traditionally high concentration of profits in the export oriented industries of the oil and raw materials sectors and the lack of mechanisms of inter-sectoral flow of capitals, it may be hardly expected that the rate of investment would increase and radical changes would occur in the nature of the reproduction of fixed capital. The share of investment industries makes 8.5 %, while the consumer complex branches account for 7.7 % of the total amount of investment in industry.

Fuel industry demonstrated deteriorating indicators of the reproduction of fixed capital at the background of decelerating rates of investment in this sector. In January through July of 2002, in fuel industry the commissioning of drilling wells decreased by 13.6 %, production drilling contracted by 16.5 %, and surveying drilling fell by 39.1 %. The decrease of investment in oil processing industries resulted in deteriorating technical and economic indicators of production. The output of oil products produced with the use of progressive processing technologies has decreased by 7.8 %.

South Russia Uralsky Central Sibirsky Far East Northwest Privolzhsky Figure 2. Changes in the structure of investment across industries in the first 6 months of 2002, in % of the respective period of the preceding year 1,0,-0,--1,--2,-The changes in the structure of the sources of financing of investment in fixed assets were characterized by a trend towards an increase in the share of own funds up to 51.6 % as compared with 49.3 % observed in the respective period of the preceding year. As compared with the first six months of 2001, the share of profits allocated for the financing of investment in the structure of own funds of enterprises has decreased by 2.5 p. p., while the share of depreciation increased by 3.5 p. p.

As concerns the structure of borrowings, there was registered an increase in the share of bank credits. The decrease in budget financing from 19.2 % registered in the first six months of 2001 to 18.9 % in the respective period of this year may be explained by a decline in outside funds from the budgets of RF subjects. The share of extra-budgetary funds in the structure of the sources of financing of investment in the real sector decreased by 1.8 p. p. in comparison with the figures registered last year.

Table Structure of investment in fixed assets across sources of financing in the first 6 months of 2000 through 2002, in % of the total 2000 2001 Investment in fixed assets 100 100,0 100, Including 1. Internal funds 53,5 49,3 51,Of which:

Profits at the disposal of organizations 21,7 24,1 21,Amortization 21,5 24,2. Borrowed funds 46,5 50,7 48,Of which:

Budgetary means 20,6 19,2 18, Including:

Federal budget 5,2 5,3 5,Budgets of RF subjects 14,3 12,9 12,Bank credits 4,0 3,3 4,Borrowed funds 9,4 6,0 5,Extra-budgetary funds 3,8 4,6 2,Other 8,7 17,6 16,Foreign investment (out of the total investment in 4,9 4,fixed assets) Source: RF Goskomstat Fuel Oil Coal Oil Industry industry industry Power Ferrous extraction Chemistry metallurgy materials metallurgy engineering Mechanical processing Natural gas Non-ferrous engineering Construction In the situation, where the internal funds in the real sector of the economy are limited and it is impossible to borrow funds for a long term, the RussiaТs economy reproduces the conditions provoking the shrinking of internal investment demand.

O. Izryadnova The Real Sector: Factors and Trends According to a Goskomstat report, in the first six months of 2002, GDP made Rub. 4842.1 billion and was by 3.9 % above the level registered in the respective period of the preceding year. The dynamic development of final demand has positively affected the dynamics of output and services of base economic sector since the 2nd quarter of this year. According to estimates, in 2002, GDP will make about Rub. 10950 billion and will increase by 3.9 % in comparison with the figures registered in the preceding year. While in the 1st quarter of 2002 there was registered an 11.6 % dip of GDP as compared with this indicator in the 4th quarter of 2001, the recovery of investment demand in March through June of 2002 resulted in the overcoming of negative aftereffects of the slump and the economy began to show a trend towards economic growth. In the 2nd quarter, GDP increased by 7.2 % as compared with the respective period of this year and by 4.1 % in comparison with the respective period of 2001. According to the estimates of the Ministry for Economic Development, on the whole in 2002 GDP will make about Rub. 10950 billion and increase by 3.9 % as compared with the preceding year figures.

A growth in output is observed across practically all industries and sectors of the economy. No doubt that the downward trend of inflation rates is a positive factor supporting the level of business activity. Zero inflation in August was an additional factor of growth in final demand. The sectors, where the generation of the new wave of inflation is possible (rise of natural gas prices, tariffs on freight, and paid household services, as well as the seasonal rise of prices in the agrarian sector, require special attention.

The output of products and services of the base economic sectors increased by 3.9 % as compared with the figures observed in January through August of 2002. While the output of manufactured goods grew by 3.8 % in January through August of 2002, the production of construction industry increased by 2.9 %. On the whole, service sectors developed more dynamically. In January through August of 2002, the retail trade turnover grew by 8.8 %, freight turnover - by 5.1 %, and communication services - by 9.7 % as compared with the figures registered in the respective period of the preceding year.

Figure 1. Changes in output across industries in January through August of 2002, in % of the respective period of the preceding year 1,0,-0,--1,An analysis of changes in the structure of industry reveals that practically all growth in production was generated by the outpacing development of industries oriented towards the domestic market.

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