REFERENCE COUNTRY RUSSIA 2.1 Macroeconomic framework

2. REFERENCE COUNTRY RUSSIA

2.1 Macroeconomic framework

a) Economic growth and country risk

For Russia this is the eighth following year of growth after the crisis of 1998. The data confirm a growth, although lower than the expectations, of the industrial production, accompanied by an expansion of the key sectors: fixed investments and internal investments.

A factor for the promotion of growth, for a country, where the 2/3 of the exports are consisted of energy products, are the increased values of raw materials, in relation to which Moscow is among the biggest producers and exporters in a global level: during the summer of 2006 the value of “blend Urals” reached the record amount of 70 dollars per barrel. Later, the prices started to decline and reached under 60 dollars per barrel.

The enormous monetary flows connected to exports are reflected positively in the main financial indexes, already contributing to the stable economic condition.

In 2006, trade transactions reached 470 billion dollars (+27% in relation to 2005) and caused a surplus over 140 billions: the exports reached 25% due to the “ price-effect”. In the internal of the total the greatest quota (66%) consists of energy products (of which 35% petroleum and 14% natural gas). The appreciation ruble, the increase of the available incomes, the demand of quality consumer goods, continue to promote the imports, in relation to which is more evident the “quantity-effect”: +31%, half of which is represented by machines and equipments, including means of transport.

The rapid increase of revenues (fiscal or not), in relation to the more limited public expenses caused a surplus to the balance of 75 billion dollars (+24%), an amount equal to 7,5% of the GDP.

In the end of 2006 the monetary reserves surpassed 300 billion dollars (+67% in relation to 2005): revenues that set Russia to the third position in world level after China and Japan. To this amount are also added 90 billion dollars which had been reserved by the Fund for the Stabilization of Petroleum prices, financed by the fiscal revenues. The Fund in operation since January 2004, has doubled its incomes over the past twelve months.

According to some more recent available data (30^th September 2006), the public debt reached 269 billion dollars. The internal debt of the country has been reduced to 17%, following the integrated incomes realised in two phases (summer 2005 and 2006). At this moment, the public debt in currency reaches about 5-6% of the GDP.

The political stability, the economic growth, as well as the decrease of the sate debt and the present low debt degree of the country have determined the improvement of the credit assessment of Russia by the three greatest Services of Credit Assessment (Standard & Poor’s, Fitch, Moody’s) during 2006.

Currently, the rating of Russia concerning the long-term exchange rate is the following: S&P and Fitch: BBB+, Moody’s: BAA2, with stable performance, respecting all of the three services. There are no intervention foreseen for 2007.

The improvement of the of the rating has contributed on the one hand to the intensively expansive dynamic of the monetary debt of the financial enterprises and industries of Russia to the international financial markets: since 30^th September 2006 the growth of these two fields constitutes the 80% of the total of the external debt of Moscow (+17% since the beginning of the year).

On the other hand, the interest of the foreign investors in the country has been increased: the flow of capitals in 2006 reached 42 billion dollars, a record amount which has finally interrupted the fifteen years of “capital loss”. On the contrary, concerning stock exchange, the index RTS (Russian Trading System) in 2006 closed with an increase over 70%, replacing the losses registered during the period May-June and also in September. However, for now the typical instability of the developing markets remains still present, as confirmed by the great differences in the index, which characterize the first months of 2007. A dominant title in the stock exchange was without any doubt the share of Gazprom, which has been quoted since January 2006.

On the contrary, at this moment the foreign investments are small: 55 billion dollars in 2006 (+3% in relation to 2005), from which less than 25% derives from direct investments. It is also confirmed the limited ability of Russia regarding the attraction of FDI in relation to the other developing economies.

The inflation continued to decline and reached 9% in 2006, according to the governmental plans, however, has registered a new increase in the course of the year (initial objective was 7-8,5%). The index of the consumption prices fell under two points for the first time after the collapse USSR : this happened due to the sterilization effect of the Stabilization Fund, as well as due to a monetary policy inspired by the Central Bank of Russia (CBR), which caused a greater flexibility to the exchange rate and a real advance of ruble about 8%. In particular, according to the first estimations of CBR, ruble was revaluated to 14,6% in relation to dollar and to 6,4% in relation to euro.

The unemployment rate continues to decline (6,9%) and the living conditions of the population are getting sensibly improved: the average wage reaches 410 US dollars (300 in 2005), while the average available income was raised in real terms to 10,2%.

Alarming is also the fact respecting a country that is under an economic development and improvement of the living conditions, that the dynamic of the demographic status registers a gradual decrease of the Russian population: from 145 million inhabitants in 2002 to142,3 in 2006. with respect to the above the data of the life expectancy are also important (72,2 years για for women and 59 for men).

The macroeconomic framework seems also favourable for 2007. the estimations concern a small decrease of the GDP, which should be increased to 6%. A greater fall is foreseen for the inflation (6,5-8%), besides in the first two months of the current works, the index of the consumption levels was equal to 2,8% and the Government expected that it could reach the analogous levels of 2006.

An attention factor could also be the course of the oil’s price, which after the record prices registered during the summer months, was gradually reduced under 60 dollars per barrel. A certain instability could concern the bank and financial sector, because of the intense growth of the volumes during the last years. Since the beginning of the year the turbulences in the international markets concerned also the stock exchange of Russia, which presented a significant instability.

It is also underlined that despite the growth quotas, Russia cannot be entered among the main economies in world level. According to the last statistics of the CB, the country is in the fifteenth position respecting GDP and in the tenth position regarding purchase capacity.

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  An economy deficiently diversified and extremely depended on the energy sector and the course of the international oil prices.
  
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  Delay respecting the realization of structural reforms, more specifically in the sector of administration and bureaucracy (with negative impacts respecting the corruption level), monopolies, judicial system (with spread lacks respecting the principles of legacy).
  
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  Impact on the financial-industrial Groups, which play an important role to the country’s economy and because of difficulties respecting the access in the SMEs’ market their presence is deficient.
  
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  A volume of foreign investments lower than the other developing economies due to spread deficiency and obstacles which are set by the administration (on central or regional level), but also due to relevant uncertainties of the legislative reference framework.
  

b) Foreign market and foreign investment opening

The favourable economic status and the growth of the available income raised sensibly the demand of commodities and quality products rendering Russia one of the most important trading market for the foreign manufacturing enterprises, which export here increased quotas of their production.

To confirm the gradual integration of Russia, we should refer to the constant growth of the transactions with the countries that do not belong to CIS and which surpassed the 80% of the total transactions volume realised by Russia.

Only in 2006, this trade rate registered a 30% increase due to the intense increase of the imports (+45%) from China, USA and EU.

EU is the first trade partner of Russia with a total quota 53%, which results from the 57% of the Russian exports to the European market and the 44% of the Russian imports in products coming from the 25 member states of EU. Among which Germany, is in the first place, followed by Holland and Italy.

In fact, Italy, as well known among the Russian authorities, is the second trade partner: the statistic data do not correspond accurately to the real dimensions of the transactions with some countries, among which Italy, concerning the main destinations of the country’s exports and imports of the country in transition. For this reason, there is an intense overvaluation of the Russian transactions with the neighbouring countries, as well as selected countries, such as Holland.

(data in million US Dollars)

The regulated framework is under gradual improvement due to the administration’s motivation, which has set as a goal the full integration of the economy to the world markets and the foreseen accession of Russia in WTO. In the future, Russia tends to enforce its cooperation with the EU, in order to create a Common European Economic Space and a greater cooperation in the energy field (EU is the first buyer of natural gas and Russian oil).

The barriers are interpreted as a limited capacity of Moscow to attract capitals for productive investments in relation to other developing economies: 55 billion dollars in 2006, from which less than 14 concerned Foreign Direct Investments. In general, the total volume of the sources invested in the country since the 90s will be equal to just 143 billion dollars, from which less than 50% is referring to the Foreign Direct Investments.

However, the data are indicative to the real origin of the financial sources, of which a bigger part of the foreign capitals invested in Russia, are Russian repatriated capitals. Many investments are realized by off shore zones or under favourable fiscal statuses. This circumstance explains the presence of countries in the first positions, although, they do not acquire the necessary financial profile.

c) Trade performance regarding Italy and bilateral foreign direct investments performance

This course is confirmed also during the last year: according to the data of the National Statistic Service of Italy (ISTAT), in January 2007, the transactions raised to 9% with respect to January 2006. The most important fact concerns the increase in 19% of our exports, in relation to a more limited raise of the imports (+5%).

As far as the composition of the products’ sectors is concerned, the three most important sectors of the Italian exports are the sector of machines (29% of the total), the sector of textile products and clothing (17%) and furniture (10%). About 72% of the Italian imports concerns as known energy products.

d) Trade performance regarding Greece and bilateral foreign direct investments performance