Russian Economic Development in 1999


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Russian Economic Development in 1999 – 2000:
can we trust the economic forecasts?

Alexei VEDEV, Econometric Unit "VEDI"

Information Used	Households	Inflation
Selected Indicators of the Russian Economy	Fiscal Policy	Interest Rates
Real Sector	Monetary Policy	Exchange Rate
Investments	Money Supply	External Balance
Loans to the Real Sector	Components of the Money Supply	Foreign Trade
		Conclusions

Financial crisis in August 1998 changed principally a macroeconomic environment in Russia as well as a financial situation. The overall economic condition before the crisis was characterized by a stable exchange rate, low inflation, and significant amount of the foreign investments, mainly portfolio investments. Systemic financial crisis that consisted of foreign currency, external payments, banking and financial markets crises destroyed almost all interrelation within the economy. Moreover, an uncertainty of the future economic development had increased and created additional difficulties for a short-term forecasting. Spreads in macroeconomic estimates produced by governmental institutions as well as independent centers were extremely large. This led to obstacles in a realization of government budgetary and private corporation plans. However, high uncertainty in Russian macroeconomic developments strengthened interests to economic forecasts – quantitative and qualitative.

First assessments produced directly after a financial crisis in August 1998 were far from reality. It was quite natural, because the uncertainty in political decisions about economic crises overcome made scenario analysis more complicated. The concrete steps in fiscal and monetary policies were also indefinite.

The general direction of the economic policy became more transparent after the changes in the Government in the second half of 1998. Consequently, forecast assessments had also changed, but movements in projections toward actual data of 1999 started only in the second half of the last year. Note, that this did not concern official assessments, which were even in the middle of 1999 far from reality. However, official forecasts influenced itself fiscal and monetary policies led by the government and defined the main targets of the state economic activity. Contrary, alternative assessments allowed private domestic and foreign investors introduce appropriate corrections in a short-term planning.

Information Used

The author is well acquainted with econometric activities and recognizes all the obstacles in macroeconomic forecasting. It is naturally, that under social, political and economic uncertainties scenario analysis goes along with the high risk for investigator's reputation and demands high skills of economic experts.

In the current survey the author used assessments made by Chase Securities Inc (Chase), Nomura Equity Research (Nomura), Center for macroeconomic analysis and short-term forecasting (A. Byelousov – the head of this Center), Russian Government (ministry of economy, ministry of finance, Central bank of RF), Bureau of Economic Analysis (first of all, E. Gavrilenkov and EA. Kosarev), WestMerchant Bank (WM), Organization for Economic Cooperation and Development (OECD), Center of the Economic Conjuncture RF (CEC), Salomon Smith Barney (SSB), and the analysts from Econometric Unit "Vedi" (Vedi).

Comparisons of different forecasts pursued the only one aim – to analyze the qualitative and quantitative relations in the national economy. The author appreciates all leading experts for their surveys and calculations.

Table. Selected Indicators of the Russian Economy.

	1991	1992	1993	1994	1995	1996	1997	1998	1999
Real GDP (% change YOY)	-5	-14.5	-8.7	-12.4	-4.1	-3.5	0.8	-4.6	3.1
Private Consumption (% change YOY)	-6.1	-5.2	-1	-3.1	-2.7	-2.1	1.8	-5	-9.6
Government Consumption (% change YOY)					-20.6	0	-2	0.1	-0.5
Investments (% change YOY)	-15	-40	-12	-24	-10	-18	-5	-6.7	4.5
Industrial Production (% change YOY)	-8	-18	-14	-20.9	-3.3	-4	2	-5.2	8.1
Unemployment rate(% to EAP)		4.8	5.6	7.4	8.5	9.6	10.8	11.9	12.4
Prices, Interest, Exchange Rates
CPI (% change YOY)	160.4	2509	839.9	215.1	131.3	21.8	11	84.4	36.5
PPI (% change YOY)			987	235	180	25.6	7.5	23.2	67.3
Exchange Rate (RUB/USD eop)		0.415	1.247	3.55	4.64	5.56	5.96	20.65	27
Exchange Rate (% change YOY)			200.77	184.68	30.70	19.83	7.19	246.48	30.75
Monetary Base (% change YOY)		1179	645	178	115	26.7	25	27.90	54.10
M2 (% change YOY)		696	407	192	127	34.2	29.9	20.8	57.2
Fiscal Balance
Consolidated Budget Deficit (% GDP)			4.6	10.7	3.2	4.4	5.2	5.7	1.2
External Balance
Exports (bln. USD)				67.5	81.1	88.6	88.2	74.2	74.3
Exports (% change YOY)				20	20	9.3	-0.4	-15.9	0.2
Imports (bln. USD)				50.6	60.9	68.8	73.7	59.1	41.1
Imports (% change YOY)				13	21	12.9	7	-19.8	-30.5
Balance or Trade (bln. USD)				16.9	20.2	19.8	14.5	15.1	33.2
Current Account balance (bln. USD)					7.9	12	3.3	1.6	20.5
International reserves (including gold, bln. USD, eop)					17.2	15.1	17.8	12.2	11.8
International reserves (excluding gold, bln. USD, eop)					14.4	11.3	12.5	7.7	7.6
Source: Goskomstat, the Central Bank, EU "Vedi"

Real Sector

Directly after the August 1998 crisis the main task that analysts faced was an estimation of consequences of inflation and devaluation shocks. In other words, the question was whether a relation between moderate inflation and devaluation rates and industrial production was positive or negative. The majority of experts supported the opinion that the financial crisis would stimulate fall in production and discussions on real sector concerned only the rates of this decline.

Chart. GDP Growth - Forecasts and Actual Data, % YOY.

Source: EU "Vedi".

In the second half of 1998experts suggested that GDP would fall by 3-9% in 1999. When some stabilization steps had been realized some assessments were corrected. However, all estimates produced before October 1999, including official, were significantly lower than the actual data. First of all, the production activity and export revenues were underestimated, and households real disposable income and private consumption were overestimated.

First features of a growth in production activity were revealed in October 1998. Moreover, at the end of the first quarter of 1999, after the improvement of the Russian enterprises financial conditions, the investments activity had increased. Factors that provided a production growth in 1999 included:

import substitution effect;
low price level on the natural monopoly products in the I half of 1999;
comparative low production costs due to drop of the real employee compensation rate;
- high oil world prices.

The influence of the listed factors was underestimated by the most of experts. Moreover, even official assessments made by the Ministry of Economy of the RF in the middle of 1999 introduced low levels of production output and GDP growths. If an import substitution effect was rather predictable (taking into consideration the volume of critical imports), a high level of energy world prices was exogenous and affected significantly a GDP growth. In addition, a real wage rate growth was lower than expected.

Stable producer's prices on the natural monopoly products in the beginning of the 1999 caused the low level of output in the related sectors. Thus, the prices on electricity grew on 14.4% in 1999, on natural gas - on 22.1%, coal - 36.5%. Certain stimulated effect for production activity was due to high world oil prices that supported output on the stable level. For example, coefficient of the export efficiency (calculated as ratio between domestic producer's prices multiply on the market exchange rate and export prices in USD) was 2.02 for natural gas, 1.30 for coal, coefficients for the non-ferrous metals also were more than 1 (on November 1, 1999). Contrary, the export of the oil products, gasoline and diesel fuel was inefficient on November 1, 1999 (less than 1). It was quite naturally, because correspondent domestic prices rose fast during second half of 1999, which supported the level of production in that sectors.

Chart. Industrial Production Output - Forecasts and Actual Data, % YOY.

Source: EU "Vedi".

Directly after financial crises in August 1998 all analysts suggested the fall in industrial production by 3-15%. Those assumptions based on negative effect of high inflation rates, banking crisis, depression on financial markets. All that assessment were revised in the II half of 1999, but also were significantly less than actual data.

Table. Production Growth and Producer's Price Index by Sectors.

	1998		1999
	PPI Growth	Output Growth	PPI Growth	Output Growth
Industry	23.0	-5.2	67.3	8.1
Electricity	3.0	-2.5	14.4	0.2
Fuel	0.8	-2.5	135.0	2.4
Including
Oil extracting	-10.0	-1.0	149.2	0.4
Oil refining	12.4	-7.4	242.3	2.5
Gas	10.5	0.8	22.1	4.1
Coal	6.1	-5.0	32.2	8.8
Ferrous metallurgy	11.0	-8.1	89.0	14.4
Non-ferrous metallurgy	76.0	-5.0	116.0	8.5
Chemical and Petrochemical	22.7	-7.5	51.1	21.7
Machinery	29.0	-7.5	50.0	15.9
Forestry	43.0	-0.4	68.0	17.2
Building construction	13.0	-5.8	37.0	7.7
Light	44.0	-11.5	56.0	20.1
Food	53.0	-1.9	63.0	7.5
Source. Goskomstat RF.

After sharp increase of the natural monopoly prices in the second half of last year the low cost of the energy will not be the factor of economic growth in the year 2000. Moreover, the fuel-energy sectors' output will be depending on the world prices, because domestic demand will be limited. It is possible to expect the scenario that the volume of exports will be stable cause the payments will be in cash and the sales of such products on the domestic market traditionally will be through the inter enterprises' arrears. The consequences of such scenario are well-known due to the past years experience: fall of investments, growth of the customers' debt, wage and taxes arrears and as a result fall of output. Taking this proposal into consideration the most of the scenarios of the fuel-energy production growth in the current year seems to be overoptimistic and oriented on the best-case variant of the world market development. The probable crisis scenarios didn't consider by experts, mainly by the governmental agencies.

Even the most conservative experts confirm that as import substitution effect as the low cost of natural monopoly products were exhausted in the beginning of the current year. Hence the key stimulus of the production increase will be the high world prices and the domestic demand growth. Note that the majority of the experts expect the downward trend of the world oil prices. The increase of the domestic demand not necessary will be the factor of industrial output growth. For example, the increase of the households' real disposable income under the stable exchange rate can stimulate imports and worsening balance of payments.

Table. Industrial Output Forecast by Sectors in 2000, in % YOY.

	I*	II**	III***
Industry	4	5	4.7
Electricity	2	3.8	0
Fuel	2	0.2	1.3
Including
Oil extracting	1
Oil refining	4
Gas	3
Coal	2
Ferrous metallurgy	2	10.9	15.3
Non-ferrous metallurgy	2.5	9.7	5.1
Chemical and petrochemical	5	3.2	10.4
Machinery	6	7	7.2
Forestry	5	5	5.2
Building construction	2	3.9	4.7
Light	6	9	13.1
Food	4	2.4	2.5
* - specify forecast of the Ministry of Economy RF - forecast of the Bureau of Economic Analysis * - forecast of the Center of Macroeconomic Analysis and short-term forecast

EU "Vedi" experts suppose that published forecasts are too inertia that means both an underestimation of key tendencies in 1999 and an overestimation them in 2000. EU "Vedi" expects the industrial output growth on the level of 1-3%.

Investments

Fixed capital investments increased by 4.5% in 1999. The growth of the investment activity had happen not directly after financial crisis, but at the end of the I quarter of 1999. As the main source of investments was the enterprises funds the growth in investments was marked only after an increase in enterprises gross profits.

However, forecasts predicted a fall in capital investments in 1999. A background for such forecasts was an assumption, that the recovery of the households income would be more intensive in comparison with enterprises funds. The actual data were above expected, including official assessments.

We should emphasize forecasts produced by the Bureau of Economic Analysis. The investigation of the GDP structure by components shows, that investments grew by 6.7% in 1999 ("BEA Bulletin N21", February 2000). According to the same investigation the further improvement in investment activity would stimulate an industrial output, that would form a demand on investments goods. As a result, the BEA's assessments of investment growth is 6-7% YOY in 2000, the official data is 2%.

It is important, that the capital investments were targeted on the replacement of the used equipment. The investments into the new technology were insignificant. This fact is the one more evidence, that the investment activity growth was the consequence of the import substitution effect. Taking into consideration the limitations of such effect it is possible to expect the stabilization of the capital investments or slightly growth.

Loans to the Real Sector

The growth in investment activity occurred along with some increases in loans to enterprises. Banking loans to the real sector rose by 51.4% in 1999, including loans in rubles - on 140%, the loans in foreign currency dropped on 21%. The notable extension of the banking loans was marked only at the end of I quarter of 1999, which coincided with the investment activity growth. Russian banks expand their investment activity toward real sector due to the next factors:

significant command of the producers' prices compare with consumer's prices. PPI was 67.3% in 1999 and CPI was only 36.5%, ruble exchange rate appreciation was 30%;
redistribution of the banking investment portfolio toward loans to the enterprises - cause of financial markets depression and negative real interest rates on operations with the monetary authorities. We should add, that the Russian banking system recovery is enacting at the expense of the shareholders, which push banking managers to provide loans - for themselves and their business partners.

Chart. Volume of Banking loans to the Real Sectors in 1999.

Source: EU "Vedi" calculations, CBR.

The key questions connected with the amount of banking loans to the real sector are the dynamics of interest rates and risks. Because of the financial markets crisis, high mistrust of the Russian population to the banking system and non-growing and expensive banking liabilities interest rates remain high and unpredictable. Credit risks of investments in Russian enterprises are traditionally high, but also include a devaluation risk. Commercial banks provide loans in rubles, but principal and interest payments are tied with an exchange rate. We should also note that real loans to enterprises adjusted to a PPI has fallen.

Households

Forecasts of the households' income and expenditures for 1999 were relatively stable and fluctuated insignificantly during last year. The key factors, which defined the households' income, were the next. First, in what extent the legal entities would recover a wage rate that dropped by several times after the crisis. Second, in what extent the government would decrease wage arrears. The recovery of the real wage rate in fact was with the lower than expected rates.

Chart. Wage and Pension Rates on Accounted Bases, USD.

Source: Goskomstat RF, EU "Vedi"

The most probable scenario corresponds with the tendency of recovery households' income in the current year. This tendency implies the growth of the real private consumption and retail turnover. According to the specify forecast prepared by the ministry of economy RF the real disposable income will rise on 2-4% and retail turnover will rise on 2%. Thus, the official scenario suggests that all the real income increment will go on the recovery of the private consumption level.

Households' deposits grew on 36%, e. i. remained the same in the real term. The main accretion was in the State Saving Bank (Sberbank RF) and due to pension deposits. Households' deposits in other commercial banks were unchanged even in the nominal term.

The amount of the real households' savings will be stable in the current year. The directions of these savings will be defined by the political stability and the contents of the financial reforms. If the banking and financial market crises continue, than the major part of the savings will directed into the cash foreign currency. The households' deposits will rise on 18-25% or remain stable in the real term. The situation can be changed, if Russian commercial banks will provide the aggressive interest rate policy, which means the real deposit interest rate on the level of 15-25%. But even in this case the deposits can increase on 5-10% in real term, according to the experts opinion from EU "Vedi".

Fiscal Policy

Note that the basis parameters of the federal budget for 1999 were calculated in the middle of 1998 - directly after financial crisis. The official forecast was formed under the great uncertainty concerning with the future of the government and stabilization measures. As a result the official assessments turned to be far from actual. Moreover, the key parameters assisted the overfullfil the budgetary plan. For example, the planned exchange rate had been 21 RUB/USD and actual was 24 RUB/USD, CPI should be 30% and actual 36.5%. The industrial production should fall on 3-5%, but it rose on 8.1%, PPI rose on 67.3%, but planned value should be 26%.

Table. Federal Budget - Planned and Actual Values.

	Budgetary plan on 22.02.99		Actual data on 1999
	bln. RUB	in % to GDP	bln. RUB	in % to
	bln. RUB	in % to GDP	bln. RUB	GDP	the planned data
Revenues	473.7	11.9	611.7	13.7	129.1
of which:
Tax revenues	399.5	10	509.5	11.4	127.5
Including
Business profit tax	36	0.9	81	1.8	в 2.2р.
Private income tax	25.2	0.6	19.9	0.4	79
VAT	143.7	3.6	221	4.9	153.8
Excise	87.1	2.2	84.2	1.9	96.6
Tax on the foreign trade	91.3	2.3	86.3	1.9	94.5
Tax on mineral resource using	9.5	0.2	10.5	0.2	110.6
Non-tax revenues	33	0.8	47	1.1	142.4
of which:
Foreign trade	23.3	0.6	34.7	0.8	149
State property operation	7.9	0.2	6.8	0.1	85.6
Revenues from non-budgetary funds	41.6	1	55.2	1.2	132.8
Expenditures	575.1	14.4	664.7	14.9	115.6
of which:
State operation	13.7	0.3	14.8	0.3	107.9
State security	51.3	1.3	55.4	1.3	108
Industry, energy and construction	14.6	0.4	16.9	0.4	116
Agriculture	9.3	0.2	9.1	0.2	97.7
Social transfers	78.1	2	85.1	1.9	108.9
Defense	93.7	2.3	116.1	2.6	123.9
Public debt service	166.8	4.2	162.6	3.6	97.4
Transfers to the local budgets	43.4	1.1	62.1	1.4	143
Expenditures of the non-budget funs	44	1.1	55.3	1.2	125.5
Deficit	101.4	2.5	53	1.2	52.2
Memorandum
	bln. RUB	in % YOY	bln. RUB	in %
	bln. RUB	in % YOY	bln. RUB	YOY	to the planned
GDP	4000	-2	4476	3.2
Industrial Production	2180	-3		8.1
CPI (Dec. to Dec.)		30		36.5	121.7
PPI (Dec. to Dec.)		26		67.3	258.8
Annual Average Exchange Rate (Rub/USD)	21	110	24	137.6	114.3
Source: Ministry of Finance RF.

Federal budget was executed on 128% in 1999. The VAT revenues was 4.9% GDP (planned value was 3.6%), the business profit tax revenues were 1.8% GDP (0.9%). The revenues on private income tax was less than planned on 21%, the excise revenues were also lower the planned value. It means, that the industrial output growth was more significant factor for budget revenues than world price growth.

The official macroeconomic forecast principally defined the key parameters of the federal budget. In this sense the plan of the budget 2000 is not already correspond with Russian economic reality. The federal budget was built under the assumption, that GDP would be 5100 bln. RUB, industrial production - 3600 bln. RUB, PPI - 19% and annual average exchange rate - 31 RUB/USD. In the I quarter of the current year the official forecast had been revised. Now the government expects GDP as 5700 - 5900 bln. RUB, industrial production - 4240-4280 bln. RUB, PPI - 27 - 29%, and the level of exchange rate seems to be undefined.

Monetary Policy

The key directions of the monetary policy occupied the central place in the governmental stabilization economic program. The official forecast contained three scenarios, the most optimistic was in the basis of the budgetary planning. The main parameters of this scenario were:

the amount of the payments connected with the external debt transactions. According to the preliminary schedule the total payments should be $17.5 bln., but the total payments was assumed as not exceeded $10 bln for 1999;

the realization of the measures for maximization tax revenues;

the limitations of the budget social expenditures;

introduction the low inflationary approach for inter-enterprises arrears reduction.

The basic scenario under the budgetary plan assumed fall of the real GDP and industrial production not more than 3% and the investments - on 5%. The money supply (M2) growth should not exceed 22-30% with the inflation 30%. Thus the monetary policy targets suggested the limitation of the money supply growth, which allow to control inflation and devaluation rates. This policy, according to the governmental plan, would stimulate production and investments. However the relation between inflation and production turned to be opposite.

Money Supply

The most of the assessments assumed the fall of the real money supply in 1999. The analysts suggested that under the slight increase of the households' real disposable income the real private savings would be stable and real enterprises' working capital would fall. This suggestion meant that the fight with inflation would be through the tough monetary policy and administrative control over the exchange rate. Note that such assumption contradicted the necessity to stimulate production and money transaction between enterprises.

Chart. Money Supply (M2) in 1999 - Forecasts and Actual Data, in % YOY.

Source: EU "Vedi"

The money supply growth in 1999 was the most significant during last decade. M2 increase did not provide the inflationary and devaluation effects, as it was assumed by the most of the analysts. The main factor, which had been defined the growth of money supply, was the enterprises current accounts. The producers invested their profits into working capital and the replacement of the old equipment. Banking system used all the enterprises' deposits for the loans to the real sector. Households' deposits in the real term remained the same.

Components of the Money Supply

Money supply (M2) had been increased on 57.2% during 1999, including the cash in circulation outside the banking system (M0) - on 42.0%, the non-cash money (deposits) - on 68.2%. As the main channels of the money supply should be centralized loans to the federal budget and purchases of the foreign currency by the monetary authorities. The principal variables were the amount of the loans from the international financial organization and external debt payments. Actually near all the increment of the monetary base was provided by foreign currency purchase of the Central Bank RF, which net amount was $3.8 bln, or about 102 bln. RUB (the increment of the monetary base was 114 bln. RUB in 1999).

Chart. Money Supply Growth Rates in 1998-1999, % per month.

Source: CBR, EU "Vedi" calculations

The actual growth rates of as the aggregate money supply as monetary base were significantly higher, than previously had been estimated. At the same time the inflation and devaluation rates were lower, than assumed. Such phenomenon has the follow explanations:

the money supply growth was mainly defined by the improvement of the enterprises' financial condition. The last one used all the funds for investments into working capital and capital investments, and the widening of the money supply didn't cause the inflation;

the fall of the households' real disposable income defined the low demand on foreign currency and low inflation rates;

the increase of the households' final demand in the second half on the last year was compensated by the growth of the domestic production.

Chart. Structure of the Money Supply (M2), in % to M2, eop.

Source: EU "Vedi", CBR.

There is a great probability that the same tendencies will be kept in the current year. First of all, the households' real disposable income and savings will increase. Taking into consideration the mistrust of the population to the banking system we can suggest that all extra saving will be targeted to the cash foreign currency.

Inflation

The assessments of the inflation rate were calculated under high uncertainty of the future economic developments. If the official forecast was provided as the governmental targets for 1999, than alternative scenarios were defined to stress the existence of the set of threats to the financial stability. The key parameters of governmental program suggested CPI growth on 30%, PPI - on 26%, and the money supply should rise on 22-30%. The average exchange rate should be 21 RUB/USD. Alternative forecasts assumed the high rates of CPI (from 50 to 150%). But all assessments supposed that as a price anchor the government would use the tough control on the naturally monopoly prices and money supply rates.

Chart. CPI in 1999 - forecasts and actual data, in % to the previous year.

Source: EU "Vedi"

The most important task for the governmental stabilization program directly after the financial crisis in August 1999 was to cut the inflation and devaluation rates. The preliminary official assessments assumed that CPI would be 30%. The majority of the alternative assessments assumed CPI on the level of 50-150%. Later the assessments had been corrected, but the new data presented in the second half of 1999 suggested the consumer's inflation as 45% or higher.

The real situation was different. The households' real disposable income growth was lower than expected. The same situation was with the real retail turnover, which real value drop had been forecasted as -3% and the actual data was -7.7%. This data shows that the fall of the disposable income was the key factor of the low level of CPI. Contrary, the growth of the production activity of the Russian enterprises defined their deposits and money supply growth.

Chart. Producer Prices - forecasts and actual data, in % to YOY.

Source: EU "Vedi"

All the forecast assessments assumed the lower PPI growth compare with consumer's prices in 1999. According to the basis hypothesis the tough monetary policy and stabilization measures should be targeted to money supply limitation, including PPI. But the producer's prices grew with the rates, which had been higher compare with CPI. And if in the beginning of the last year the rapid producer's price growth considered as compensatory effect after sharp devaluation, than in the middle of the 1999 such growth pointed to the cost-push inflation potential forming.

Interest Rates

The forecast of the interest rates for 1999 was quite awkward, because of the crisis on the Russian financial markets - in the most of the surveys the interest rates assessments were absent. This fact also connects with the impossibility to identify the term "interest rates" after financial crisis. It means the low identification of the financial risks, interest rates, liquidity and markets' turnover. The key problem is to define the minimal cost of the money in the national economy and the minimal interest rates in the context of the market economy.

The keeping banking crisis increases the cost of the banking liabilities. The banks have to place their assets into the high-risk segments, including the corporate equities, promissory notes, corporate debts and loans to the real sectors. These factors create the additional possibility for the new banking crisis.

Under the current condition of the Russian financial system the identification of the interest rates will not significantly changed. The long- and medium-term financial instruments are absent: the major part of the deposits in the Central Bank is overnight deposits, the average term of the loans to the enterprises is about 4 months (according to the polls' data provided by Russian Economic Barometer). The six-month and more financial instruments are not liquid, with the high risks and can not be the guide as the interest rates for the economic agents.

Exchange Rate

All the assessments of the exchange rate exceeded the 27 RUB/USD for 01.01.2000. Such assumptions were justified according to the next suggestions. Firstly, the access of the Russia to the foreign loans was indefinite along with the high level of external debt service payments. This meant, that the Central Bank of RF should buy the significant amount of the foreign currency and issue the correspondent amount of the rubles. The new money would form the demand on foreign currency. Secondly, the foreign currency is traditionally the most attractive savings for the domestic economic agents. The major assessments suggested that in the case of the households' disposable income growth all the private savings would be targeted to the foreign currency. Thirdly, the capital outflow is high and the official attempts to cut it entail the great doubts. Fourthly, the households' disposable income would stimulate the imports increase. Fifthly, the necessity to reach agreements with the foreign investors about profit repatriation from the domestic debt markets meant the additional capital outflow.

Chart. Forecasts of the Exchange Rate on 01.01.2000, RUB/USD.

Source: EU "Vedi".

The major of the experts assumed the stable real exchange rate in 1999. Theoretically the fall of the world oil prices and the negative results on the Russia external debt talks can affect on the exchange rate dynamics. The scenario, under which the effect of listed factors is postponed and will realize later also possible in the current year.

ОThe actual exchange rate in 1999 turned to be lower compare with the assessments produced by as officials as independent. The roots for underestimation of the exchange rates were:

the high level of the world prices on fuel and energy;

relatively low level of the payments connected with the external debt service due to restructuring or simply non-payments;

suspense the problem of the profit repatriation of the foreign investors from domestic debt market;

low level of the households' demand on the cash foreign currency. The problem of withdraw by the individuals "frozen" deposits in foreign currency from the commercial banks also decreased the demand on foreign currency;

- the persisting of the banking crisis limited the demand on foreign currency from this economic agent.

AМll the listed factors will defined the dynamics of the ruble exchange rate in 2000. Moreover the some of the factors will not depend on the Russian monetary authorities decisions and the exchange rate trend can be easily changed from outside.

External Balance

The condition of the Russian balance of payments was significantly improved in 1999. If the current account balance was $1.6 bln. in 1998, than this value was $20.5 bln. in 1999. The balance of trade was $30.2 bln., balance of non-financial services - -$2.0 bln., balance of the investment income was -$8.6 bln. according to the Central Bank of RF data. Moreover, Russian State Statistic Committee (Goskomstat) data the balance of trade was $33.2 bln. in the last year.

The scatter of the main parts of the balance of payments was not significant in the most scenarios, which were assumed the minimization of the payments on the public debt and keeping the world oil prices on the high level. But no experts suggested such significant growth of the balance of trade.

Chart. Current Account Balance in 1999 - Forecasts and Actual Data, $ bln.

Source: EU "Vedi"

The scatter of the assessments of the current account balance was not significant, but all the forecasts were lower than actual data.

Capital account balance was -$12.5 bln. in 1999 ($2.8 bln. in 1998). As the key characteristics of this account we should point out the low level of the foreign investments (direct and portfolio), insignificant amount of the loans from IFO, and large capital outflow. The surface analysis of the capital outflow shows that it was $17 - 18 bln. in 1999.

The assessments of the key sections of the Russian balance of payments for 2000 based on assumption of keeping the current trends, i. e. the high level of the world oil price level, stable volume of imports. Also assumed, that the loans from IFO will be $5-6 bln. and capital outflow will be the same as in 1999.

Foreign Trade

The volume of the Russian exports was quite stable and defined by as the external market capacity as the productivity of the national industry, taking into consideration the lack of investments and poor condition of the assets in fuel-energy and metallurgy sectors. The sharp ruble devaluation should stimulate Russian exports, but it had not happen, including because of output limitations.

Chart. Russian Exports in 1999 - Forecasts and Actual Data, $ bln.

Source: EU "Vedi"

The structure of the Russian exports remained the same and the share of fuel-energy commodities was 42.4% in 1999 (40.2% in 1998), metals - 15.1% (16.9%). Respectively the assessments, which suggested the increase of the exports in 2000, looks not validate, because of evident downward trend of the world oil prices and the capacity of the domestic production. But according to the official data, prepared by the ministry of economy, the growth of the Russian exports will be 3% YOY. Independent experts are even more optimistic and their forecasts pointed to the export increase on 5-7% YOY. Experts from EU "Vedi" assess the volume of exports on the level of the last year, because even under negative scenario the export efficiency will stimulate redistribution of the products from domestic to external market.

Chart. Market and Exports Exchange Rates (left scale), RUB/USD,
, the Deviation of Market Exchange Rate from Exports Exchange Rate (right scale), %.

Source: CBR, EU "Vedi"

The export exchange rate is calculated as the ratio between the producer prices and the export prices of commodities, which are consisted 55-60% of the total exports under the zero export profitability.

The volume of the Russian imports in 1999 fell on 30.5% YOY and equaled $41.1 bln. The main factors, which defined the fall of imports, were sharp ruble devaluation and decrease the households' disposable income. But in the last year the tendency of the real exchange rate appreciation and real households' disposable income was marked.

Chart. Imports and Households Real Disposable Income, in % YOY.

Source: Goskomstat RF, EU "Vedi"

The assessments of Russian imports were higher than actual, what could be explained by the overestimation of the households' real income. The majority of the experts converged that the import substitution effect is over now. Thus the key factors for import dynamics will be real exchange rate and real disposable income. The ministry of economy assessments suggest the import growth on 9% YOY in the current year and independent experts - on 3-5%.

Chart. Russian Imports in 1999 - Forecasts and Actual Data, $ bln.

Source: EU "Vedi"

The volume of Russian imports depended on real exchange rate appreciation and households' real disposable income growth. Because of the actual data of the disposable income was less than forecasted the volume of imports turns to be overestimated.

Conclusions

The results of Russian economic development in 1999 confirm that the current tendencies are difficult for understanding and forecast. The main methodological difficulty was to assess the financial flows between the enterprises and households as the economic agents after financial crisis in 1998. The financial balance of the consolidated government was stable, as the exogenous defined balance with the rest of the world. All the estimates suggested the more rapid recovery of the households' income compare with enterprises' revenues. The key threats were the high inflation and devaluation rates. Thus as the main stabilization measures were considered the tough monetary policy and administrative exchange rate control.

Respectively, the fall of industrial production and GDP was forecasted. Meanwhile the industrial output and GDP turned to be higher than had been assessed. Actual PPI was 1.5 - 2.0 times higher than had been projected. The CPI and exchange rated were also higher projected values. Note that the actual values' deviation from projected parameters was in favor of the federal budget.

Chart. Radar Diagram of the Official Forecast and Actual Data.

Source: EU "Vedi", Russian Government

The plan of the federal budget for the year 2000 can be fulfilled or overfulfiled, because the key macroeconomic parameters have been already revised by the government. For example, the GDP, industrial production and investments will be higher, than projected. The conclusion can be that the government doesn't understand the processes in the national economy or it uses the wrong approach for forecast's calculations.

Besides the assessment of the financial flow structure between the enterprises and households the other basic discussed hypothesis was the relations of the inflation and industrial output. The government position assumed the negative relation, which meant the fall of production under the higher inflation. The actual data for last year testify the opposite relation and the high rates of producers' prices stimulate output.

The forecasts of Russian exports were quite stable, which were connected with its' fuel and energy structure. The is a great hesitation about the adequacy of the assessments for the current year, because of a) downward trend in the world oil prices and b) the limitation of the capacity of the domestic production. The import's forecasts are more indefinite, what can be explained by the households' real disposable income and real exchange rate prospects. The scenario of export stabilization and imports growth seems to be probable.

As the main anti inflationary measures assumed the control for producer's price and money supply growth rates. In actual fact it was the combination of the increase of enterprises' revenues from domestic sales along with the high exports' income under their stable physical values. It is important, that in 2000 the reverse situation is possible, under which the low PPI will be kept with the high CPI.

The prospects for exchange rate level will be depend on the ratio between demand and supply of the foreign currency. The supply of the foreign currency will be defined by current account balance, mainly by balance of trade. The capital outflow and imports' growth will correct the demand/supply ratio.

The keeping of the banking crisis and depression on the financial markets make the interest rates forecast incorrect. But under the condition of the indefinite interest rates the loans to the real sector will be inaccessible and banking deposits - too risky.

Finally we want to note, that a comparison of different forecasts has, first of all, a methodological sense, connected to a casual influence analysis. If such influences are forcible, than the quantitative assessments are interesting. But for such complex system like Russian economy in transition some arithmetic average (or "consensus") forecasts have no sense.

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