Recent Developments

Recent Developments • The Russian import regime has been liberalised considerably. All enterprises and individuals are now allowed to trade without special registration, and are free to import nearly all products. Also, the Russian currency rouble is now fully convertible for foreign trade transactions. • Hong Kong's total exports to Russia increased by 2% to US$216 million in 2002, while its total imports from

Russia grew by 15% to US$323 million. • The Russian economy is forecast to grow by 4% in 2003. Consumer spending is expected to expand further in view of continued improvement in real incomes and falling unemployment amid increasing business activities. In the meantime, while industrial production will continue to perform well, business investment is likely to be further bolstered by steady foreign orders on the back of sustained demand for energy products.

In 2002, the economy grew steadily by an estimated 4.3%, with domestic demand being the major impetus. Consumer spending continued to expand, thanks to increases in wages amid falling unemployment. Falling inflation, though still at a high level, as a result of prudent monetary policy also enhanced consumers' purchasing power. In particular, sales of consumer items grew at a steady pace, as households strived to improve their living standards. On the other hand, industrial production and business investment,

facilitated by inflows of foreign capital, also performed well. Externally, exports improved gradually despite the sluggish world-trading environment, thanks to the sustained demand for energy products, which account for about half of Russian exports. Although imports expanded at a faster pace along with economic growth, a continued trade surplus was recorded. Inflation was 18.6% in 2001 &

15.1% in 2002 & it’s projected at 12% for this wear, although independent economists say the inflation will be about 14%. Given a stable political and economic environment, the Russian economy should continue to grow, aided further by the government's determination to consolidate its budget while improving tax collection. All in all, the Russian GDP is forecast to by 4% in 2003. Since a large portion of business activities and incomes of

the private sector are not reported, the official statistics tend to understate Russia's actual economic performance. If these unreported earnings, estimated to be some 20 to 30% of the official GDP, are taken into account, the Russian economy should show a better performance. In the year 2000 Russia saw high economic growth (over 8%), substantial budget and trade surpluses, and high international reserves (three times their 1998 level).

This is a remarkable achievement, but will be difficult to maintain, since this performance is due to a number of exceptional factors, in particular high oil prices and a strongly undervalued currency. For the longer term, if oil prices continue to stay at the current high levels, the Ruble will likely appreciate and therefore the competitiveness of Russia will again decline. This year we already see a weakening of performance with a real appreciation

of the Ruble and a slow-down in the growth rate. For the longer term, Russia cannot rely exclusively on energy resource revenues, but must focus on deep institutional reform of its economy if it is to achieve the sustained high investment levels that are required for broad-based productivity and employment growth. Current weaknesses in Russia’s economic structure are reflected in the following features: •

Too little investment, with the exception of the large financial and industrial groups (FIGs) which have benefited from the energy price spike. • Too little creation of new firms and growth of SMEs, which currently represent only 30% of employment in Russia, compared with almost 60% in Central Europe. • Too little bank financing, esp. for SMEs. • Too little foreign direct investment (less than half of

the FDI going to Hungary, and less than one fifth of FDI to Poland). • High capital flight abroad (estimated at over $ 20 billion per year) The fundamental problems of Russia can be found in four key areas: 1. The business environment, while somewhat better than in the past, remains fundamentally unfavorable. 2. The quality of public administration is weak. 3.

The banking and financial system is not working effectively. 4. Social services and safety nets are not effectively provided. The Russian authorities under President Putin have recognized the need for fundamental reforms and have prepared, and begun to implement, a good program of broad-based reforms. Early progress has been made in a number of areas: improved payments discipline, tax reform, simplification

of investment regulations, and improvements in the legislation of land ownership. However, much more progress with reforms will be needed: • Further reforms of the tax administration, treasury and debt management systems • Better corporate governance, especially as regards creditor and shareholder rights • More predictable legal and regulatory treatment of foreign investors •

Less involvement of governmental agencies, especially of local and provincial authorities, in commercial and business matters • An effective judicial system • Improvements in the banking and financial system. These reforms are as important as they are difficult and time consuming to put in place. Considering the steady, albeit slow progress the government has made to date, it is to be hoped that further progress, perhaps even at a more intensive pace, can be

made. The World Bank has been assisting Russia for many years with credits and with advice in promoting its reforms and recovery. The current government program builds on and is consistent with the program of reforms which the World Bank has been supporting with a series of structural adjustment loans since 1997. The implementation of that structural reform program was interrupted by the crisis of 1998 and slowed down by the many changes in government which occurred between 1998 and 2000.

However, the fact that there was no serious reversal of policies, and that the government has now put in place a strong reform program of its own, which is widely supported in the country, can be seen as a measure of success of the earlier support which we have provided along with the international community. Today, Russia requires much less foreign financial support than it did in the 1990s, and hence the World Bank stresses especially our analytical and advisory support, including support for reform of

public administration, reform of the relationship between the federal, provincial and municipal authorities, modernization of budget management and tax administration, reform of natural monopolies (including electricity, gas, railways, etc.), and monitoring of the business climate and of the success of measures to support investment. The Russian authorities however remain interested in financial support from the World Bank. We are therefore providing financing for projects in support of traffic management in

Moscow, improved municipal water supply and waste water treatment, the voluntary resettlement of vulnerable people in Northern Siberia, for coal and forestry sector investments, and education and health programs (including HIV/Aids and tuberculosis). Russia has been following the way of democracy and a market –oriented economy for about a decade now. It is gradually repaying its debts and there is a series of negotiations constantly held with other countries on common economic and political issues.

The year 2000 showed the economic growth but at present Russia is going through a kind of test of weather it can reach an economic stability and stick to the road of crisis-free development. The current economic growth is mainly based on high oil prices and devaluation of ruble. Row materials export provide a huge part of the national income and low exchange rate of the national currency lead to even greater incomes as the price for gas and oil is paid in dollars.

On the other hand, high inflation rate represents an obvious danger to the industry the economy in the whole. Devaluation and rising prices can lead to the drop in consumer demand, reduction of credit programs and investments. In this case, the natural reaction from the side of producers can result in the capital outflows from the country, which will produce a negative impact on the Russian economy. Besides, there is also bureaucracy and a tangled system of management that makes businesses

feel uncomfortable in Russia. However, the investments into the national economy and reasonable exchange rate policy can provide a stable economic growth. And although there is still a lot to be done, some achievements have already been made. A vivid example that illustrates the current improvements consists in the trade surplus appearance, increasing reserves, a growing number of successful businesses and a fall in capital outflows from Russia. All these factors are essential for the growth of the national

economy and there are also other signs of the revival. A good image and brand mark have become valuable parameters for the success achievement. Management is improving, too, as a great number of result-oriented professionals are aiming at the long-term enterprises. Foreign know-how is readily borrowed in a number of industries. And high demand for the joint ventures’ production can be well exemplified by the existence of dealers

with western franchises, that charge large sums of money for their services, like it happens with car service. Moreover, labor, land and production costs are quite low, which along with the growing propensity to consume make Russia a very promising country for business development. Although the standards of living of a large part of Russian population leave much to be desired, still in many spheres things are obviously changing for

better. It can be well illustrated with the services’ sector growth. There are plenty of service businesses established in recent years and they have proved to be quite profitable. Energy and brains have become the main factors that determine success and development of private entrepreneurs. And it is not just a better management that provide certain improvements but also the tendency of heading towards international standards of transparency and ethics.

As more and more people can afford to spend more or less considerable sums of money for leisure and recreational facilities this sector is becoming more and more diversified. At present in large Russian cities there are plenty of sport and medical centers that offer professional service for those who are ready to pay for it. Together with the economic revival traveling is becoming more and more popular. Still, a lot of Russians prefer to spend their holidays in recreation centers

within the country or take some tours around Russia (like, for example Golden Ring tour). The main reasons for that is that these holidays result to be quite inexpensive and of a good quality. To sum it up, although standards of living in Russia are not the same as those in the Western Europe, there is a place for the well-grounded hope for the economic prosperity