Economic Situation
in the Russian Federation
(performance in 2000-2001)

1. Performance in 2000

As regards the development of major macro-economic indicators, 2000 was in whole one of the most successful years for Russia in terms of economic development for the last three decades.

For the first time in thirty years, the GDP volume increased in 2000 by 7.7% over the previous year, while the industrial production grew by 9%. The growth of fixed capital investment was even more pronounced, amounting to 17.4%.

Incomes of the population increased by over 9%. At the same time, the surplus of the federal budget amounted to 2.5% of the GDP. Foreign trade surplus amounted to 61 billion dollars. The high level of foreign trade surplus and the federal budget surplus enabled Russia to service its external debt without additional external borrowing. Budgetary equilibrium and adequate use of monetary and credit instruments by the Bank of Russia made it possible to control the inflationary pressure on the economy while the monetary reserves improved significantly.

The annual inflation rate amounted to 20.2% which was almost in conformity with the initially planned level (18%-20%).

The GDP power intensity decreased by about 5% for the first time during the last ten years. Economic growth rate in Russia was comparable to that of South-East Asian states which are the most dynamic countries in the world. As a result of this economic growth in 1999-2000, quantitative economic parameters now correspond to those of 1994, while they improved qualitatively.

Qualitative differences between the two periods (pre-crisis and current) concern, first of all, the factors of development and methods of the solution of budgetary problems.

Before crisis development was based on external borrowing. The real sector, especially investments, underwent the stage of recession. In the GDP structure, the highest growth rates were registered in the services sector. Strengthening of ruble led to a deterioration of the balance of payments.

In the post-crisis period development is based on domestic factors. Production and investments are growing. The GDP production structure is characterized by comparatively higher growth rates in the goods production sector. The Russian economy has remained competitive during the whole period while ruble has slowly strengthened. The share of extended government expenditure in the GDP has steadily decreased.

Moreover, the period before crisis was characterized by a double deficit - that of extended government budget and the balance of payments deficit. At the same time, in 2000, a significant double surplus was reached, as regards both the extended government budget and the balance of payments.

A major depreciation of ruble in real terms after August 1998 proved to be the key factor of economic revival; as a result, the import decreased by half as against the level that existed before crisis and opportunities emerged for domestic production growth. In combination with the curb on prices of natural monopolies' products and a slowing down of wages and salaries during that period, this has also led to a decrease in production costs. From the second half of 1999, the devaluation effect has been supplemented with a significant growth of prices of Russian exports.

However, one should note that the external factors wouldn't have worked, but for the years of reforms, when profound institutional transformations were achieved, the necessary market infrastructure was created and a significant Russian business stratum learnt to operate in a new market environment.

At the same time, a general improvement of the social and political situation in the country after the completion of the election campaign at the federal level, the initiation of the government long-term economic strategy and responsible financial and monetary policy pursued by the authorities were additional factors of influence. In particular, work on tax reform was carried out, tax and social benefits were revised, customs tariffs were partly modified, guidelines of the pension reform were approved and draft laws were worked out, aimed at reducing administrative barriers to business activities (draft laws on licensing, registration and streamlining of control and supervisory functions of executive power authorities). The federal budget for 2001 was adopted which fundamentally differs from the previous budgets.

In 2000, all elements of the final demand, except government needs, exerted equal influence on economic growth as follows:

• general improvement of the external economic situation made for about 35% of the GDP growth;
• increase in consumer demand - approximately 34%;
• growth of investments - about 27%;
• increase in demand for government needs - 4%.

However, the respective influence of each factor changed considerably in the course of the year. First, the positive influence of the external economic factor went down by the end of the year. In many respects, this was due to a considerable consolidation of the real ruble rate.

In 2000, the effective ruble rate (calculated on the basis of the currency basket of Russia's major trade partners) improved by 11.2% and is currently at the level of mid-1995, but still essentially lower than before crisis.

In 2000, export of goods increased by 38.9% over the previous year: during recent months, however, export growth slowed down due to strengthening ruble and some deterioration of the external economic situation.

In contrast, import stepped up in the second half of the year, particularly during the last months. In 2000, import volume increased by a total of 11.9%.

The structure of import was in general unfavorable for economic development. Its physical volume increased by 24%, mainly due to the import of goods from the CIS states (a 28% increase) at relatively low prices.

As a result, at the end of 2000 a number of major macro-economic indicators (GDP, industrial output and fixed capital investment) slowed down.

2. Performance in January-February 2001.

At the beginning of this year, most major quantitative macroeconomic indicators continued to grow compared with the corresponding period of 2000. In January-February, the GDP grew by estimated 4.4%, industrial output - by 3.1%, fixed capital investment - by 7.6%.

Inflation rate increased slightly at the beginning of the year. In January 2001, the inflation rate amounted to 2.8%, in February - 2.3%, which was higher than in the corresponding months of the previous year. In March, however, the estimated inflation rate will be below 2 per cent - about 1.7% (which makes a total of 6.9% for the first quarter). Industrial producer price index at the end of the last year and at the beginning of this year was slightly lower than consumer price index, which will curb the inflationary processes in the economy.

The positive dynamics of major indicators reflecting the living standards of the population continues to persist. In January-February 2001, real disposable monetary incomes of the population amounted to 105.7%, retail sales to 108% and remunerated services - to 106.5% of the level which was recorded during the corresponding period of the previous year.

In general, however, real disposable monetary incomes of the population have not yet attained the pre-crisis level (in January-February they were estimated at 81% of the level recorded in January-February 1998).

The total unemployment rate (calculated with the ILO technique) dropped by 100 000 people and, as of March 1, stood at 6.85 million unemployed or 9.6% of the economically active population.

In January-February exports and imports of goods increased by estimated 8.1% and 6.5% respectively in comparison with the corresponding period of 1999. Large foreign trade surplus remained. In January-February it was estimated at 9.5 billion US dollars.

However, the tendency toward a slower economic growth which manifested itself in the end of 2000 has continued into the beginning of the current year.

3. Performance in 2001

Throughout the last year the macroeconomic situation in Russia remained stable. The main social and economic figures for 2001 are quite impressive.

Economic growth in 2001 reached 5,0 p.c. not only due to favourable price situation in the traditional markets of Russian exports, but also due to structural reforms and increasing effectiveness of industrial sector and high-tech industries. The key difference of the year 2001 from the two previous years was the emergence of positive trends in the domestic demand and consumption that became the main sources of the economic growth.

Federal budget surplus amounted to 2.9 p.c. of GDP. This record result could not be achieved over the whole modern history of Russia.

In 2001, industrial production grew up by 5.2 p.c. compared to the same period of 2000, while the growth rate in agricultural sector amounted to 5.9 p.c. Significant growth in output was registered in the machine-building and metal-working industry (8 p.c.), chemical and petrochemical industry (6.9 p.c.) as well as non-ferrous metallurgy (4.7 p.c.).

In 2001 the balance of payment continued to be strong – with the reduction of trade surplus by US$ 10.7 billion the gold and currency reserves grew by US$ 8.6 bn. As of the end of 2001 they amounted to US$ 36.6 bn. Deterioration of the situation in the world commodity markets as an outcome of the global economic slowdown and recession in the US economy had no significant negative impact on Russia’s international trade.

One of the major factors behind favourable macroeconomic developments was a well balanced monetary policy aimed at slowing down the inflation rate and ensuring flexible but stable rouble exchange rate dynamics. The exchange rate policy stimulated the expansion of exports and, at the same time, was not prohibitive for imports, allowing the country to increase its international reserves.

The improvement of the general economic situation encouraged Russian enterprises and business institutions to step up their investment activities in 2000-2001.            Fixed capital investments during this period grew up by 8.2 p.c. yearly. The favourable macroeconomic situation strengthened economic agents’ optimism and served as an additional factor of growth which resulted not only in a greater scale of utilisation of the existing production capacities, but also in putting new enterprises into operation.

The volume of foreign investment in the non-financial sector of the Russian economy has also increased. In the first nine months of 2001 cumulative volume of foreign investments rose to USD 9,7 billion.

The government gives top priority to the creation of a more favourable investment climate. The entrepreneur-friendly changes in the taxation policy and the overall improvement in the macroeconomic situation in the country are resulting in fostering investment activities by foreign companies.

The last three years turned out to be the most crucial period in the history of modern Russia landmarked by the economic turnaround and embarkation upon a steady path of resurgence. The GDP increased by 20 p.c., industrial production – by 30 p.c. and investments by more than 35 p.c. during the said period. Russian state debt reduced almost three times in GDP ratio over the past three years. A number of important social parameters, in particular employment rate and real incomes of the population, have also improved. Still Russia needs to exert every effort  to sustain its economic growth and achieve social prosperity. According to the Russian Prime Minister Mr M.M.Kasyanov, the main task for the current year will be “to put into full-fledged operation the earlier initiated mechanisms of the  economic reforms”.