05.06.07

The condition of Russia’s foreign trade continues to rapidly decline. In January – February 2007 the growth of exports, as estimated by Ministry of Economic Development, with respect to the same period of 2006, amounted only to 0.3%.  The Bank of Russia offered a slightly different number at 4.8% calculated by the balance of payments method. Estimation of Ministry of Economic Development for the first quarter of 2007 is also higher – 5.3% of growth, according to the Customs – 5.8%. However, it does not change the fact of the matter: the growth of exports in January – February 2006 was significantly higher – 41%. Experts of Ministry of Economic Development explain this deceleration of exports by the tendency which started in the fourth quarter of 2006. Export is slowed down by a decrease of its share in the amount of joint products, as well as by the decline of free market prices of oil. Experts are all in agreement: the coming months and years will not bring any positive trends.

However, the main threat comes from imports. In January – February 2007, according to the evaluation of the same Ministry of Economic Development, the growth of import amounted to 33.1%, and for the first quarter 36.8%. The Bank of Russia offered even higher rate for January – February – 52.5% of growth, comparing to 30.3% for the same period of last year. Starting with the second half of 2006, import is gaining momentum on account of growing investment activity (revealed in growing share of investment goods in structure of imports). Also, the growth of imports will be stimulated by continuous increase of real ruble rate – 5%.

Customs statistics are even more depressing. According to preliminary data, during January – April 2007 imports from outside of the CIS in value terms amounted to 43.3 billion dollars and, comparing to the same period of 2006, increased by 55.2%. Moreover, this trend is growing. In April 2007 the value import volume of goods from outside of CIS reached 12.34 billion dollars and, in comparison with April 2006, increased by 59.9%.

Also in April imports of mechanical engineering products increased by 71.6%, food imports – by 51%, chemical industry imports – by 25.5%, imports of textile products and footwear – by 93.7%. Car imports increased due to the growing rate of purchases of means of ground transportation 2.1 times. At the same time purchase of mechanical equipment increased 1.8 times, of instruments and optical equipment – by 58.2%, electrical equipment – by 38.6%.

In April procurement of alcohol and non-alcoholic products increased 4.9 times, of fish – 2 times, vegetables, fruits and nuts – 1.8 times, meat and organ meats – by 52.4%.

Why Such Import is Bad for Russia

Explosive growth of imports may possibly be good in the state of structural reorganization and modernization of already developed and some developing nations. But for Russia it is truly dangerous. It stops not only the development and normal import substitution, but also inflow of capital into noncompetitive industry sectors. It delivers a blow to whole machine-engineering complex, frustrates motivations of national research-and-development activity and innovations, puts on standby technological underdevelopment of designing and engineering industry base, including strategic sectors.

Why is this taking place in light of a seemingly high rate of industrial growth? Economists point to the extensive nature of sector investments, their weak technological base, and dependence on the international market. According to the research conducted by World Economic Forum, the lead in area of competitiveness belongs to the economies of the United States and Germany. The fastest growth of productivity development is also found in highly-developed countries: USA, Germany and Japan. By this parameters BRIC countries, for example, are very much inferior: India holds only the 27th place in competitiveness in the world, China is in the 64th place.

Besides this, certain doubts exist regarding long-term stability of economic growth in all BRIC countries, including China. Weight of ineffective sectors and underdeveloped territories in their economies will have to be dealt with, sooner or later. It can affect not only financial stability, but also stability of value-adding investments and of political situation in these countries.

In respect to Russia, in the key industries providing for technical progress it is falling behind even these countries.

In What Direction is the Industry Growing?

Conclusions of the report are so pessimistic that they practically leave no room for Russian industry in the near future for a full role in the world differentiation of labor.

First of all, Russian companies are characterized by a significant spread in performance efficiency. Intra-industry differences are much greater than differences between average values for industry branches. In a group of most competitive and effective companies, which amounts to 20-25 %, performance level exceeds intra-branch figures over three times. At the same time a significant number of companies – 30-40 percent – have very low performance levels. A high number of ineffective enterprises occur in all industry branches, even in the most competitive ones. Intra-industry spread of performance between top 20 percent and bottom 20 percent of companies reaches 20-25 times.

At the WTO Threshold

Such parameters make effective entry into WTO simply impossible since social and political costs will surpass all imaginative profits. The fact is that the group of ineffective enterprises mostly consists of small companies of 100-250 employers located in small and medium-sized towns with population fewer than 100 thousand people in low-developed regions. These enterprises are often oriented on regional market. They are marginally profitable but exist because they pay lower salaries and do not make investments, using existing assets, though often well-worn and morally obsolete. In this group 70% companies use equipment mostly older than standard operation time. If the Russian market is to be “opened” even in part, they will be doomed, because occupational retraining system does not exist, and public is historically non-mobile.

Investments Without Innovations

But this is only the beginning. In 2004 over a third of large and medium-sized enterprises did not make any investments in capital assets. Approximately 20% of companies made insignificant investments much lower than necessary for simple reproduction. So, only 45% of companies conducted investment activity in the volume which theoretically allows expanded production. Main share of equipment investments is dedicated to purchasing of imported machinery. From all industry branches only in machine-engineering factories dedicate more than half of their investments to equipment of home manufacture. However, the more competitive is the company, and the more investment activity it conducts, the higher is the share of imported equipment. Among most investing-active enterprises share of imported equipment exceeds 70%. In other words, even modernization of an engineering complex does not generate development of equipment-building production, that is, does not contribute to expansion of the internal market, the rise of innovations and the growth of research and development. According to the March 2007 research of Institute for the Economy in Transition, in 2007-2008 industrial innovation activity will degenerate even more.

Workers do not Decide Anymore

Also, according to research, Russia does not have an extensive amount of qualified personnel. On the contrary, in the list of the 20 most significant development limitations, the lack of qualified workers takes second place. Existence of this problem is noted by over 50% of companies in all groups. The deficit of qualified workforce is caused, for the most part, by the fact that companies are not able to pay an adequate salary. The worst of all is that this process is irreversible: the main bulk of Russian industry is losing an engineering environment able to at least copy achievements of advance technical ideas.

Lagging of the Quality of Life

It is obvious that the accumulation of tangible wealth in Russia, in BRIC countries and others, is lagging behind the enhancement of quality of life. As a result much of private capital along with its owners, privacy institutions and decision making complex flows out to “trouble-free” countries with high and liberal standards of life. Creative and self-reproducing science-and-engineering environments, able to generate research-and-development and innovations in broad spheres of scientific and technical progress, are vanishing rapidly. For some time this process will be moderated by an ideology of accumulation of national wealth, concentration of production and attempts to create competitive industry leaders in aviation, shipbuilding, high-tech and defense industries. However with every change of generation and governing elite, this ideology will undergo serious testing.

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