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Section 2
Real Sector of Economy

2.1 Main Trends in Real Sector ofEconomy

General characteristic. The economicconjuncture of 1996 was greatly influenced by the extremely acute situationwith the Budget use, the high rates of growth of the domestic governmentborrowing, the deterioration of the real sector financial situation, decline offinancial discipline at all the levels of economy. The negative effect of allthese factors expressed themselves during the Presidential electoral campaignand the Government formation.

During 1996, the conjuncture of the financialmarkets, and, first of all, the dynamics of the interest rates stayed in acertain dependence upon the political factors. To the middle of June, theinterest rates in the government stocks market and for interbank creditsreached their maximal values. In the second half of the year, a significantreduction was observed.

The reduced profitability of the investmentsin the government stocks and the relatively low rates in the interbank marketactivated the growth of the demand for the foreign currency. Due to this, inOctober, the Central Bank increased 2‑fold the mandatory norms of theforeign currency liabilities, while the reserve requirements to the Rubleliabilities were somehow eased. As a result, in 1996, the nominal MICE exchangerate of USаDollar to Ruble grew by 19.7%. The purchasing power of the USаDollarin the Russian market, taking into account the domestic inflation, lessened byabout 1.6% against 41% in 1995.

During the whole year, the export volume wassteadily growing, the net external balance remained positive. In 1996, theexternal turnover between Russia and FSU and foreign states (withoutnon-organized trade) made US$а147.4аbn, or by 4% more than in 1995; the exportgrew by 8.1%, the import reduced by 2%. The export grew due to both the growthof the supplies of the main export goods, and the significant growth ofthe mineral feedstock export prices.

In 1996, the inflation index was 121.8%. Inaverage by month, the consumer prices grew by 1.7% against 7.2% in 1995. In1996, the industrial producers prices growth rate made 125.6% in whole, against275% in 1995. During the whole year, the prices dynamics was the mostinfluenced by the augmentation of the control of the prices for the products ofthe natural monopolies from the public authorities and the limiting monetaryand currency policy of the Russian Central Bank.

In 1996, the monetary mass growth ratesreduced almost 3‑fold,compared with the previous year, but, in contrast with the first years of thereform, they exceeded the prices growth; this confirms the steady enoughprocess of inflation reduction. At the same time, the adaptation of mosteconomic agents to the reducing inflation rates and УappreciatingФ moneywithout real responsibility of enterprises for financial liabilities, as well,as the poor development of the crediting system were the factors thataggravated the payments crisis.

The measures aimed to suppress the inflationby limiting the monetary mass without the relevant control over the situationwith the settlements in the economy favored the deepening of the negativephenomena in the settlements system. In 1996, especially in the first half ofthe year, the various Уmoney substitutesФ (bills of exchange, tax exemptions,commodities credits) and barter transitions reached significant magnitudes inthe turnover system; hence, the additional cutback of the taxation base andreduction of the real inflows to the Budget.

Table 2.1

Dynamics of main macroeconomicindexes,
% of previous year

	1993	1994	1995	1996
Gross domesticproduct	88	87	96	94
Indusdtry	88	79	97	95
extracting industry	85	89	98	95
processing and manufacturing industry	84	74	95	91
Ruraleconomy	96	88	92	93
Investments	88	76	90	82
Traffic of transportentities	75	86	99	95
Salesturnover	102	100.1	93	96
Paidservices	70	62	83
External tradeturnover			121	104
Export	104	111	120	108
Import	89	114	113	98
Real	110	116	87	100
Unemployed, officiallyregistered	114	126	158	126
Pricesindexes:*)
consumerprices	940	320	231.3	121.8
food	900	310	223.4	117.7
non-food	740	270	216.3	117.8
paid services topopulation	2410	620	333.2	148.4
industrialprices
endproducts	990	510	275.0	125.6
purchasedresources	-	305	314	126.1
capitalinvestments	1160	53	270	139.3
transport ofcargoes	1850	760	320	122
official exchange rateof US Dollar	300	285	131	119.7

In 1996, the fierce trouble in the labormarket could be avoided. As of the end of the year, the number of theofficially registered unemployed was 2.5аmn. persons (3.4% of the total numberof employed in the national economy) against 2.3аmn (3.2%) at the end of 1995.Herewith, the number of unemployed grew, in 1996, at a lower rate than in thepreceding three years.

The uncompleted system markettransformations, the absence of dynamism and integrity reform, the weakstructural, fiscal, and budgetary policies, and the unbalanced policy ofgovernmental borrowings did not favor the animation of the economy and thecessation of the investments decline.

Table 2.2

Dynamics of main structural components ofGDP production,
% of previous year

	1995	1996
GDP	95.8	94.4
Goods	95.1	91.5
Services	96.4	97.1
market	95.3	96.2
non-market	99.5	99.7
Nettaxes	96.1	95.7

Production of GDP. In 1996, the GDP wasRbl.а2,256аtrln; in the real terms it reduced by 6%, compared with 1995. Thestructure of the GDP production conserves the trend to the growth of the shareof services at a steady decline of the goods production.

In comparison with 1995, the year 1996 showedthe recession in the main sectors of the national economy: industry,construction, transport, and rural economy.

The volume of industrial production decreasedby 5.5%, compared with the previous year. In 1996, in contrast with 1995, theproduction recession was observed in practically all the industries, except gasproduction. This is due to the continuing contraction of the effective demandfor the products of the branches oriented, mainly, to the Russian market. Theproduction recession made 4.7% in the extractive industry and 9.1% in theprocessing and manufacturing industries. The dynamics of the industrialproduction is negatively affected by the remaining trend to the growth of therecession at the enterprises of the defense industry under conversion to 30% in1996 against 23% in 1995, as well as the progressive reduction of the consumergoods production.

The production of the rural economy reducedby 7%, in compared with 1995. The trend, revealed in 1995, when theagricultural production characterized by a deeper recession than the GDP andindustry, continued. The financial situation of the rural economy worsenedbrutally, as well. If, in 1995, the sector had 57% of unprofitable entities ofall forms of property, in 1996, the relevant number was 75%.

The dynamics of the value added in 1996 wasespecially significantly influenced by the important decay of the investmentactivity parameters: the construction production decreased by 11%, comparedwith the preceding year. The share of construction in the value added reducedfrom 8.6% in 1994 to 6.2% in 1996.

The accrual of the gap between the economicpotential of the real sector of economy and the level of production of goodsformed under the influence of the demand and crediting limitations isaccompanied by the reduction of the production potential load and employed,and, hence, growth of the additional production costs.

Formation of GDP by incomes. The deterioration of the financial situations of enterprises, thegrowth of non-payment’sin the economy and the delays in payment of wages had a negative effect on theincomes formation. In 1996, the significant accrual between the indexesdetermined on the accrued basis and the estimates of the real money flows inthe economy grew significantly.

Table 2.3

Structure of GDP by incomes, % ofGDP

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