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RUSSIANECONOMICREPORTOctober2002TheWorldBank,RussiaOffice№4–OCTOBER2002IntroductionOnanaggregatelevel,Russia’seconomycontinuestoperformwell,andhasbeengrowingsteadilyinaninternationalenvironmentwheregrowththreatenstobecometheexception.Oilpricesareup.Businessandconsumerconfidencelevelsareatpost-crisisrecordhighs.True“islandsofcompetence”haveemerged,inparticularinthecorporatesector(inthemainintheserviceandconsumptiongoodsindustries),wherenewandimprovedwaysofdoingbusinesshavecreateddemonstrationeffects,spreadinggoodpracticesacrossindustriesandimprovingdemandfordomesticallyproducedintermediarygoods.Optimistsarguethatthenetworksestablishedbetweenthese“islands”arebecomingstrongenoughtolifttheentireeconomyontoasustainablegrowthpath,bygeneratingadiversifiedindustrialbasewhichservesstrongdomesticmarkets.Ontheotherhand,thereisafamiliarlitanyofstructuralimbalances.Thepublicsectorremainsinefficient,publicresourcemanagementinadequateandpublicserviceprovisionoftendismal.Andtheeconomyremainshighlyconcentratedinatleastthreedimensions.Ownershipintheprivatesectorisconcentratedinafewconglomerates.Newfirmsandstart-ups,thedriversofgrowthinothertransitioneconomies,havebeenslowtodevelop,withtheenterprisestructureinheritedfromthesocialistperiodstilldominatingmuchoftheeconomy.Aboveall,Russia’seconomicperformanceremainscruciallydependentonnaturalresourceexports,andinparticularonoil.ThisperiodmaywellturnouttobedecisiveindeterminingthepathofeconomicdevelopmentinRussia.Inaperiodofhighoilpricesandpoliticalstability,reformshavebeencarriedoutatunprecedenteddepthandspeed.Butthesefavorableexternalconditionsareunlikelytolastforever.Onlythenwillitbeclearwhethertheeconomyhaschangedenoughtoadapttoadversecircumstances.Thisreportlooksatstructuralchangefromseveralangles.Inthegeneralreviewofrecenteconomicdevelopments(partI),weusesectoraldisaggregationtodeterminewhetherRussia’spositivegrowthperformancehasledtogreaterdiversificationoftheeconomy.Oilextractionandthepublicsectornotonlycontinuetoattractthelargestshareofdomesticinvestment,butthesearealsothetwosectorswherewageincreaseshavebyfaroutperformedtherestoftheeconomy.Notsurprisingly,laborandcapitalbothgo“wherethemoneyis”.However,theoutcomeofthisre-allocationisthatRussia’seconomyisevenmoredependentonnaturalresources.PartIIofthereportcontainsabriefoverviewoftheincreasingpercapitaincomedifferentialsacrossregions,whicharedrivenmainlybydomesticfixedcapitalinvestment.Thepublisheddatasuggeststronglythattheseflowsareagainprimarilyattractedbytheavailabilityofnaturalresources.Finally,SectionIIIintroducesthefirstofaseriesofbi-annualsurveysdesignedtocapturetheeffectsoftheGovernment’srecentlyintroducedderegulationlawstoencouragesmallfirmgrowth.I.RecentEconomicDevelopmentsRussia’smacroeconomicperformancehasimprovedoverthecourseof2002,butgrowthrateshavestabilizedatalowerlevelthanthepreviousyear.Thebalanceofpaymentsshowsasharpdecreaseincapitaloutflows.Businesssurveysindicategrowingconfidenceinsomeregionsandsectors,andRussia’senterprisesfinditeasiertofinancetheiractivities,domesticallyorabroad,thaninpreviousyears.Yet,despitethreeyearsofhighgrowth,highoilpricesandWorldBankRussiaOfficeEconomicsUnit3politicalstability,andwithmuchoftheeconomynowoperatingatfullcapacityutilization,thegrowthrateoffixedcapitalinvestmenthasslowed,andGDPgrowthwithit.Itwillbelowerthisyearthanatanytimeduringthe1999-2001period,raisingthequestionastowhythefavorableenvironmenthasnottranslatedintoinvestmentrateswhichcouldaccommodateRussia’sneedsforfinanceandtechnologicalrenewal.Inpartthisisbecauserealincomeshavecontinuedtoriseandrealwages,togetherwithothercostfactors,havestartedtoexercisepressureonenterprisecosts.Overallprofitabilityfellandinsomesectors,paymentdisciplinestartedtoerode.Consumptioncontinuedtooutpaceinvestment,whilerisingrealincomesallowedcustomerstosubstituteimportsfordomesticproducts,despiteslowerappreciationoftherealexchangerate.Inaddition,growthremainshighlydependentonthepricesofoilandgas.Justasmoderateoilpriceshadanadverseimpactontherateofgrowthearlierthisyear,growthstartedtopickupafteroilpricesrose.Ifthegrowthrateofindustrialproductionisdisaggregated,itbecomesclearthatgrowthacceleratedinthenaturalresourcesectorsanddeceleratedindomesticmanufacturing.Moreover,realwagesgrewmuchfasterintheresourceextractingsectorsandinthepublicsectorthanelsewhereintheeconomy.Thesearealsothetwosectorsthataccountforthebulkofinvestment.ItappearsthatresourcescontinuetobedrawnintothemostcompetitiveofRussianindustries(naturalresourceexports),andtothepublicsector.Ifgrowthistobesustainableitbecomesevenmoreurgenttocreatetheconditionsandinstitutionsfordiversifyingtheeconomy.IndustrialproductionandcompositionofoutputAccordingtoGoskomstat’slatestandstillpreliminaryfigures,thenegativemonth-to-monthgrowthrateofindustrialproduction,whichdominatedthemacroeconomicdebatebeforethesummer,hasreverseditself.HavingfallenfromOctoberthroughFebruary,industrialoutputonamonth-to-monthbasisgrewby3.2perc