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REFERENCE COUNTRY RUSSIA 2.1 Macroeconomic framework



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2. REFERENCE COUNTRY RUSSIA




2.1 Macroeconomic framework

a) Economic growth and country risk


The macroeconomic framework is positive. According to preliminary estimations, in 2006, the GDP increased between 6,7% and 6,9%, a higher percentage in relation to the one provided by the “financial law” (+5,8%, later revised to +6,6%).

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.




Data in billion US dollars

2000

2001

2002

2003

2004

2005

2006

GDP

251

300

342

451

604

752

1.010

Trade Transactions (total data)

151

155

168

211

281

370

468

- exports

106

102

107

135

183

245

249

- imports

45

54

61

75

97

125

128

Surplus of Trade balance

61

48

46

60

86

120

141

Petroleum Urals/p.b. (end of month in$)

26,9

23,1

23,5

27,3

35,6

54,4

55,8

External debt

161

149

152

186

215

259

269

Public debt

117

104

97

98

97

71

46

Capital flow income (+)/outcome (­)

-24,8

-15,0

-8,1

-1,9

-8,0

1,3

41,6

Fund for the Stabilization of Petroleum Values

-

-

-

-

18,8

43,0

89,1

Reserves (gold and currency)

28,0

36,6

47,8

76,9

124,5

182,2

303,7




Annual variation %

2000

2001

2002

2003

2004

2005

2006

GDP

8,3%

5,0%

4,3%

7,3%

7,2%

6,4%

6,7%

- industrial production

9,0%

4,9%

3,7%

7,0%

7,3%

4,0%

3,9%

- stable investments

17,7%

8,7%

2,6%

12,5%

10,9%

10,5%

13,5%

- retail trade

8,9%

10,8%

9,2%

8,0%

12,5%

12,0%

13,0%

-agricultural production

5,0%

6,8%

1,7%

1,5%

3,1%

2,0%

2,8%

Stock Exchange index RTS

-4,5%

79,2%

39,8%

57,9%

6,9%

83,3%

70,8%

Official Discount Date

25%

25%

21%

16%

13%

12%

11%

Exchange USD/Ruble (end of month)

28,2

30,1

31,8

29,4

27,8

28,8

26,3

Exchange Є/ Ruble (end of month)

26,1

26,5

33,1

36,8

37,8

34,2

34,7

Total inflation of the period

20,2%

18,6%

15,1%

12%

11,7%

10,9%

9%

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 (30th 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 30th 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.



Political stability and economic growth have contributed to the rapid growth after the crisis in August 1998. today’s Russia, under the socio-economic profile, is a country a lot different than some years ago, however, with some weak spots because of the uncompleted transition process. More specifically, as underlined by the most important International Financial Organizations (IMF, OSCE, Word Bank, EBRD) the main factors of weakness are:

  • An economy deficiently diversified and extremely depended on the energy sector and the course of the international oil prices.

  • 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).

  • 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.

  • 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.

Over the last years, an improvement of the functional framework (financial, legislative, regulative) and mainly of the general increase of the average available income determined an intense demand of financial services from the families and enterprises’ side promoting the growth of the system. The total improvement and the support of the system raised the intermediation degree, which is still under the average not only of the industrialized countries, but also of the other economies in transition.


INDEXES

31.12.01

31.12.02

31.12.03

31.12.04

31.12.05

31.12.06

Total of the active balance of trade (billion euros)

119,2

125,2

152,2

188,8

285,1

404,8

Annual variation %

33,7%

31,2%

35,1%

27,4%

36,6%

44,1%

Own means (billion euros)

17,1

17,6

22,1

25,0

36,3

48,8

Annual variation%

58,5%

28,1%

40,2%

16,2%

31,2%

36,3%

Credits per client (billion euros) *

49,9

54,3

73,0

102,8

159,5

231,5

Annual variation %

56,2%

35,7%

49,5%

44,8%

40,3%

47,3%

Deposits of natural entities (billion euros)

25,6

31,1

41,2

52,3

80,5

109,3

Annual variation %

52,1%

51,9%

47,4%

30,3%

39,3%

37,7%

Source: Central Bank of Russia

b) Foreign market and foreign investment opening


Russia is gradually being opened towards the international trade and the foreign investments. As a main exporter in world level of natural gas and petroleum, Moscow seems to have an increasingly significant role as energy supplier, however needs greater sources (financial and technological) in order to develop new deposits, raise the production and respond efficiently to the increased demand, also internal, of hydrocarbons.

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.


Trade Transactions of Russia with the most important trade partners in 2006

(data in million US Dollars)







2006

2006/05 (variation%)

Quota % of the total 2006




Total

Exports

Imports

Total

Exports

Imports

Total

Exports

Imports

Total

439.524

301.976

137.548

29,2%

25,1%

39,3%

100%

100%

100%

of which:




























Non CIS countries

374.891

259.691

115.200

29,9%

24,3%

44,5%

85,3%

86,0%

83,8%

of which:




























EU

231.619

171.043

60.576

30,9%

28,3%

38,8%

52,7%

56,6%

44,0%

of which:




























Germany

42.929

24.493

18.436

30,1%

24,1%

38,9%

9,8%

8,1%

13,4%

Italy

30.830

25.111

5.719

31,4%

31,8%

29,5%

7,0%

8,3%

4,2%

Netherlands

38.542

35.862

2.680

45,1%

45,7%

38,0%

8,8%

11,9%

1,9%

Poland

14.879

11.479

3.400

30,9%

33,1%

23,8%

3,4%

3,8%

2,5%

United Kingdom

14.034

10.362

3.671

26,9%

25,1%

32,3%

3,2%

3,4%

2,7%

Finland

13.199

9.201

3.998

22,8%

20,3%

29,0%

3,0%

3,0%

2,9%

France

13.453

7.602

5.852

37,5%

24,4%

59,3%

3,1%

2,5%

4,3%

China

28.639

15.751

12.889

41,0%

20,7%

77,4%

6,5%

5,2%

9,4%

USA

15.320

8.922

6.397

40,7%

41,1%

40,2%

3,5%

3,0%

4,7%

CIS

64.633

42.285

22.348

25,2%

29,6%

17,6%

14,7%

14,0%

16,2%

of which:




























Byelorussia

19.934

13.084

6.850

25,9%

29,3%

19,8%

4,5%

4,3%

5,0%

Kazakhstan

12.808

8.969

3.839

31,2%

37,3%

19,0%

2,9%

3,0%

2,8%

Ukraine

24.197

14.979

9.218

19,7%

20,8%

17,9%

5,5%

5,0%

6,7%

Source: GosKomStat-RosStat
During the last years, the random expansion of the transactions was followed by an increase of the FDI. An internal demand in constant growth motivated a lot of foreign enterprises to establish their production units in Russia, even though the persistent presence of many and spread barriers of various forms (tariff, administrative, legislative and customs barriers) does not give any incentives to the Foreign Direct Investments.

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


The bilateral trade relations between Italy and Russia reached excellent levels. In particular, in 2006, the transactions volume surpassed 21 billion euros (+19% in relation to 2005). The Italian exports to Russia registered the biggest increase in the context of the extra communitarian countries (+26%). The Italian imports from Russia also raised, however in a lower degree (+16%).

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%).



Despite all these, the trade balance remain negative and the deficit is not going to decline in a significant degree in the direct future for two reasons, the first of which is of a structural nature: the intense dependence of Italy on the imports of energy products and raw materials and the increased prices of these in the international markets.
Course of trade transactions Italy-Russia (2003-2006)





2003

2004

2005

2006




million Є

variation %

million Є

variation%

million Є

variation %

million Є

variation%

Trading

12.077

3,1%

14.679

21,5%

17.779

21,1%

21.230

19,4%

Exports

3.847

1,2%

4.963

29,0%

6.075

22,4%

7.639

25,7%

Imports

8.230

4,0%

9.716

18,1%

11.704

20,5%

13.591

16,1%

Balance

4.383

6,6%

4.753

8,4%

5.629

18,4%

5.952

5,7%

Source: ISTAT
The favourable dynamic of the bilateral relations increases during time the importance of Russia as a trade partner of Italy among the extra communitarian countries: the transactions with Moscow reach 9% of the total. Data even more relative to the Italian manufacturing enterprises are those related to the exports: 5,6% of the Italian products (5% in 2005) has Russia as destination market.

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.



An important share on the market have also the cosmetic products, whose selling data are more than positive. The share of the vehicles of the companies Ferrari and Maserati destined to the Russian market is sold since years in advanced payment, the high quality ornaments and furs are in their largest part Italian products. The affluent imports towards the Russian market contributed to the new promotion of the Italian shipbuilding, after years of stagnation. It is important to be mentioned that it concerns however, Russian clientele either in case that the purchases of the products are realized in Russia, re-entering this way in the statistics of the trade transactions, or in case that the purchases are realized directly from Italy or other countries, and so they are not included in the transaction data.

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



Course of trade transactions Greece-Russia (2003-2006)





2003

2004

2005

2006




million Є

variation %

million Є

variation%

million Є

variation %

million Є

variation%

Trading

2.662

-2,7%

2.571

-3,4%

3.664

+3,6%

4.018

+9,6%

Exports

0,285

-8,0%

0,268

-5,9%

0,275

-2,6%

0,441

+60,3%

Imports

2.377

-2,0%

2.303

-3,1%

3.389

+47,1%

3.577

+5,5%

Balance

- 2.092

-1,1%

- 2.035

-2,7%

- 3.114

+53,0%

- 3.136

+0,7%

Source: EUROSTAT


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