RUSSIAN ACADEMY OF SCIENCES INSTITUTE OF ECONOMIC FORECASTING Forecast of Russian economy indicators 1 : (Business as usual)

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1 RUSSIAN ACADEMY OF SCIENCES INSTITUTE OF ECONOMIC FORECASTING Forecast of Russian economy indicators 1 : (Business as usual) THE MAIN FORECAST RESULTS - DINAMICS DYNAMICS OF GDP and ITS COMPONENTS IN 2008 PRICES, % GDP Households consumption Public consumption Fixed capital accumulation Exports Imports MACROINDICATORS IN CURRENT PRICES (trln. rub.) GDP Gross profit and gross mixed income Salary fund (including latent) Taxes on production and import Reserve fund and National Wealth Fund Rouble-to-dollar exchange rate estimated by PP GDP estimated est. by PPP (trln.us doll.) GDP per capita by PPP (ths.us doll.) GDP per capita in US GDP by PPP, % DEFLATORS DYNAMICS, % per year GDP deflator Household consumption deflator Fixed capital accumulation deflator Consumer price index PUBLIC ACCOUNT PARAMETERS (trln. rub.) Budget incomes Budget expenditures Budget Surplus(+)/Deficit(-) HOUSEHOLDS INCOMES AND EXPENDITURES (trln. rub.) Households incomes Salaries Bank savings Net household credits, per year BALANCE of PAYMENTS (bln. doll.) Exports Imports Net exports Net capital inflow MONETARY SPHERE International reserves (bln. doll.) Money supply, dynamics in Share of money supply in GDP, Share of cash in money supply, in LABOR FORCE Labor productivity, dynamics in % Employed, mln. people Unemployed persons, mln. people The Russian economy indicators forecast in a form of the quarter bulletin has been issued since February The bulletin s archive can be found at the and websites. 1

2 Analytical summary Significantly increased the level of uncertainty in Russian economy dynamic is associated not only with the escalation of geopolitical instability, but also with the absence of a clear domestic economic trend. Economic environment at the beginning of 2014 was formed under the influence of the continuing weakening of the Russian national currency, the stagnation of industrial production and investment demand. All these factors, along with the possible complication of trade and economic relations with developed countries has enabled a large number of experts to talk about the high probability of negative scenarios of the Russian economy in Key risks of the current economic situation connected with the relations of Russia with the developed countries. In General, they will be concentrated in the financial sector and in trade of high-tech products. In part Finance a threat to macroeconomic stability is the capital flight and difficulties with raising funds on external markets. In trade of high-tech products, the risks are concentrated in the defense complex and the machinery production, which formed a certain dependence on supplies of intermediate products from the Western countries. However, these risks still remain unfulfilled. In addition, in part Finance the negative development of events may be reduced as due to use of the state reserves, and through the process of repatriation of a part of previously exported capital. Taking into account these factors, we believe it is possible not to use in the current version of the forecast additional hypotheses about possible worsening of external conditions. While it is safe to say that the significant worsening in the macroeconomic situation does not occur, and a number of indirect factors indicate that the economic dynamics in the current year may be significantly better then result of the previous year. Most encouraging trends January-February 2014 is the preservation of high growth rates of real wages and retail turnover in January-February (in comparison with analogous period of the previous year the growth of these indicators where and 103.2%). Household consumption remains the most important source of economic stability. According to our estimates, the growth of investments in 2014 will be in the range of 2-3%. Such indicators are possible on the background of the gradual recovery of investment activity of the largest corporations with state participation after the failure of 2013, and also due to a low base of comparison. Ruble devaluation will have a positive impact on the situation in exporting industries. The most favorable terms given to those of them are the largest consumers of infrastructure monopolies services: metallurgy, chemical industry, coal mining. It can be assumed that Russian exports of raw materials in the short term would be slightly sensitive towards geopolitical instability. In contrast, imports demonstrates negative trend. According to our estimates, as a result of which occurred in the 2014 devaluation of the ruble price protection of Russian goods in the domestic market due to changes in exchange ratios for consumer goods as a whole increased by about 20%, durable goods on 10%. In capital goods only managed to restore price parity with major trading partners. Thus, the most import substitution can occur in the consumer products sector, to a lesser extent - in the intermediate part of the goods and the demand small - on the investment products. As a result, we can expect a positive impact of net exports on economic growth. According to our estimates, the devaluation of the ruble for every 10 percent creates additional revenues of the consolidated budget in the amount of 450 billion rubles. Along with the maneuver inside the pension system, it creates opportunities for increase of government consumption. Thus, the economy has formed a set of factors that contribute to the formation of the dynamics of GDP in 2014 not less than 2.5%. However, the risks that growth rates will be lower also exist. In addition to geopolitical instability should be mentioned factors associated with the possible transformation of additional income for exporters in investment demand and the capital outflow, the decrease in investment imports against the background of devaluation of the ruble, slowdown in the implementation of major infrastructure projects. In these conditions, monetary policy needs to address two key tasks: to create conditions for 2

3 gradual reduction of pressure on the ruble and maintaining debt financing investments and working capital. In these conditions, rising interest rates may not be considered as a long-term measure, which must be replaced by the period of easing of monetary policy. According to our estimations, the capacity of the current devaluation of the ruble exchange rate is about 20%. Accordingly, we are close to a situation of equilibrium on the currency market. The further devaluation of the exchange rate could have an adverse impact on the economic dynamics as a result of inflationary pressure and reduce demand for domestic products with a large share of imported intermediate production, and due to the reduction of modernization of capacities. Capital outflow is the most important element of worsening economic conditions in Thus in this direction can be concentrated measures of economic policy. While estimates of capital outflow in the current year are from 60 to 100 billion rubles. The main subjects of this process are a speculative capital funds and unused profits of exporters. As for speculative capital, its movement will depend on the actual state of the economy. Cross-border operations of the banking system will be formed on the background of toughening of the control of activity of the Central Bank and growth of external risks. The outflow of capital in sector of exportoriented companies is explained by the absence of important goals for investing in conditions of low growth of demand inside the country and in the world economy. Stimulation of domestic demand for the products of these industries can be an important source of reducing the outflow of capital from the commodity sector. Scenario conditions and key assumptions Parameters of the base scenario were adjusted under in the current version of forecast. Energy sector data match to the current scenario conditions made by the Ministry of economic development of Russia. Gas prices were decreased in 2014 so that continuing gas prices decreasing will be resulted to 301 doll./m3 at the end of perspective period. But physical volume of gas exports restored in 2013 to the level of Oil foreign supply weren t much changed. The increase of oil product exports and output in at 4.6% and 1.1% in average, respectively, should be noted. It was produced by shortening of oil supply from Kazakhstan. Along with growth of exports dynamics of other exports (non-fuel exports) was changed. The share of other exports increased from 32.7% in 2013 to 37.0% in 2016 while it was 34.1% in the final date in previous scenario. Significant national currency weakening has resulted to more attractive conditions for nonfuel exports. The share of other imports will be growing during the whole prospect because of decrease of customers and investments imports and as the result of their shares in total imports. Ruble exchange rate to leading currencies experienced the most adjustment in the current forecast. Political factors along with economic activity slowdown caused deep falling of ruble rate. The ruble-dollar rate was reduced appreciably at 14% in 2014 (37 rubles per dollar) and at 11% at 2016 (39.7 rubles per dollar). The ruble-euro rate was reduced even more at 18% in 2014 so it will be 52.8 rubles per euro at the end of the forecast period. 3

4 MAIN EXOGENEOUS VARIABLES EXTERNAL CONDITIONS VARIABLES AND CONNECTED WITH THEM PARAMETERS Oil price "Brent",$/brl.(end of the period) Oil price "Brent", $/brl Gas price, $/1000 m Oil export, mln t Gas export, bln m Oil extraction,mln t Gas extraction, bln m Euro zone GDP growth rates,% USA GDP growth rates,% Deflator of USA GDP EXCHANGE RATES VARIABLES Dollar to ruble exchange rate Euro to ruble exchange rate INTERNAL CONDITION PARAMETERS Minimum wage,rub Prices dynamics of natural monopolies (% per year) Electrical energy prices Gas prices Transport tariffs EXTERNAL ECONOMIC PARAMETERS The other exports share, % The other imports share, % MONETARY SPHERE Business credits share in the GDP,% Customer credits in household consumtion,% CONSOLIDATED STATE BUDGET PARAMETERS (bln.rub.) Expenditures for economy to general amount of expe Net government domestic securities issue Pension per person,average for year rub External lends DEMOGRAPHY VARAIBLES (mln. people) Working age population Main forecast results Taking into account the conservation of current economic trends and no additional negative impact from external world we expect growth rate of Russian economics to be 2.6% in At the same time growth rate of household consumption will slow down to 2.7%. And government consumption will grow with the rate of 1.7%. The decisive contribution to economic dynamics will be made by year growth of fixed capital investment at 2.5%. At that increment of investment financed from the budget will not be large. It will be financed mainly from private investment (growth at 1.8%) and capital investing of public state companies (2.8%). Exports is expected to have little increment at 0.4% and imports is going to decrease at 1.2% in Imports of consumer goods will reduce almost at 8%. With the conservation of current economic trends we consider growth rate of GDP to decrease to 1.5% in 2015 and 2.3% in Achieving higher economic dynamics requires more active monetary politic measures and further stimulating of investment activity. In addition recovery of demand for import goods will constrain economic growth. The positive factor in middle term is the trend of faster growth of productive efficiency in industry not in spite of crisis development but rather owing to. If this process is large-scaled then with improvement of economic conditions it could be an important factor of growth acceleration in In whole in the growth rates of Russian economy with business as usual will be 2.1% in average. Forecast results and analytics of the main blocks in The current edition of bulletin can also be seen on the website: 4

5 Tax and budget block In 2013 growth rate of the consolidated budget revenues reduced to +1.3% (it was +10% a year ago). On January 1, 2014 the budget income was 21.2 trillion rubles or 31.8% to GDP (against 33.8% in 2012). The considerable positive increase was observed only for excises and personal income tax. Growth of revenues from excises was connected with rising tax rates for alcohol and tobacco. The increase of budget income from the personal income tax was determined by tax base growth: in 2013 salaries grew up by 11.1% (including compensations in the budget sector). Negative or zero growth rates were observed for other tax revenues. The budget income from company profit tax reduced by 12 % because of the tax base decrease (in 2013 the profitable enterprises financial results reduced by 3.2%, financial results for whole economy by 14.3%, the share of unprofitable companies increased from 25.9% in 2012 г. to 26.8% in 2013). The decrease was also observed for custom duties: the growth rate for the export duties was -1.3%, for import ones (-) 6.7%, that was caused by the foreign trade turnover deceleration from +2.3% in 2012 г. to +0.3% in Among the oil-and-gas revenues the highest growth was observed for the receipts from gas production and export: the regular payments for gas resources usage increased by 21%, the export duties for gas by 10.5%. This growth was caused by increasing physical volumes of production and export (by 2.3% and 9.9% consequently) as well as by growth of the base tax rate for gas production from 509 rubles per 1000 cubic meters in the end of 2012 to 582 rubles in the first half of 2013 and 622 rubles from July, The budget revenues from crude oil and oil products production and export had much lower growth rates. The regular payments for crude oil resources usage grew by 2.7%, the export duties for oil products - by 6.8%. At the same time, the export duties for crude oil reduced by 6.3% because of the physical volumes of export decrease by 1.4% and reduction of the export prices by 2.7%. The consolidated budget expenditures were 22.1 trillion rubles in 2013 (33.2% to GDP) having increased relative to 2012 by 4.3%. Hence, the real growth rate of the budget costs was negative (at the Consolidated budget incomes from the main taxes (in comparison to the corresponding last year period and in relation to GDP volume, %) Incomes October-December, growth rate, % January-December, growth rate, % January-December, % to GDP / / / / Company profit tax Personal income tax Internal VAT VAT for import Excises Regular payment for natural resources usage Import duties Export duties Incomes, total Out of them oil and gas incomes The GDP value for 2013 ( billion rubles) is the first estimation of the Federal State Statistics Service. 5

6 level of -5%) as the public consumption deflator was +9.8%. Concerning the functional structure of the budget expenditures first of all it s necessary to note increase of the percent costs (by 16.6% for the internal loans and by 5.3% for the external ones). Besides, the positive growth rate was observed both in current and in constant prices for the expenditures for national defense (increased by 16.1% in current prices), for state security and law enforcement (+11.9%), education (13.3%), sport (+18.2%), agriculture and fishery (+32.7%), public road system (+13.5%). At the same time, the expenditures for the national economy (except for the costs for agriculture and road system mentioned above) decreased by 13%, for health care by 11.1% (including for the ambulance in 4 times), for the social policy by 32%. Thus, a stagnation of the budget revenues limited opportunities for the equal growth for all government expenses and resulted in a necessity to cut a part of social expenditures with aim to maintain the positive growth in a priority fields. The budget revenues increase close to zero and the positive growth of the expenses caused the consolidated budget deficit of 965 billion rubles (including the federal budget deficit of 323 billion rubles, deficit of the regional and local budgets 642 billion rubles). The government papers issue was a main source of the federal budget deficit financing (a net issue was 358 billion rubles) as well as the external loans (53 billion rubles of lending minus repayment). For the regional budgets the main financing resources were formed by transfers from the federal budget, the municipal papers emission (a net issue was 77.6 billion rubles) and bank credits (a net lending was billion rubles). On January 1, 2014 the aggregated amount of the Reserve Fund was billion rubles having increased by 974 billion rubles for a year, including billion rubles of unused in 2012 revenues of the federal budget, 3.9 млрд. руб. income from the fund means using, billion rubles the currency difference. The volume of the National Wealth Fund was billion rubles, including 2.74 billion rubles income from the fund means using, 216 billion rubles the currency difference. In 2013 the extra-budgetary funds revenues were 8.96 trillion rubles (13.4% to GDP), having increased by 9.5% year by year. An increase of the tax revenues (the main part of which is formed by social insurance payments) was 15.8% while volume of the transfers from the federal budget reduced by 2.2%. The extra-budgetary funds expenses were 8.8 trillion rubles (13.2% to GDP) having increased by 16.3% to 2012 level, including expenditures for the social policy by 17.1% (or 944 billion rubles). Therefore, growth of the extrabudgetary funds costs allowed to level the reduction of the corresponding consolidated budget expenses. The forecast In 2014 the consolidated budget revenues are forecasted at the level of 24.1 trillion rubles (29.4% to GDP). The growth of the budget income as a whole will be +13.8%, of which the tax revenues will increased by 11.4%, the non-tax income by 29.3%. An acceleration of the budget revenues growth will be determined by the ruble weakening that will allow to earn an additional income from the currency difference of the oil-and-gas funds means (which are kept in the foreign currencies) as well as from the custom duties (their growth will be +13.9% relative to -1.9% in 2013). Simulation for 2014 in conditions of the dollar exchange rate increase by 10% relative to the inertial scenario (being described in the bulletin) gives the estimation of such ruble weakening for the tax and budget sector. An additional budget income is likely to be 825 billion rubles, including 476 billion rubles from the custom duties, 212 billion rubles from the VAT, 37 billion rubles from the regular payments for the natural resources usage. The budget expenditures will be 24.5 trillion rubles. The growth rates for other tax revenues will be % (depending on type of taxes), that will be caused by the low level of 2013 (for the company profit tax), the tax tare increase (for the excises) and growth of the tax base (VAT, personal income tax, regular payments for the natural resources usage). Depletion of the low base effect and the national currency weakening will lead to the deceleration of the consolidated budget income increase in to %. The highest growth rates will be observed for the non oil-and-gas revenues (personal income tax, VAT, excises), while the oil-and-gas 6

7 income will increase only by 2-3% per year. The low growth will be produced by changes in the tax rules for the crude oil production: lower rates of the custom duties for the crude oil will be only partly compensated by higher of the base tax rate for the regular payments for the crude oil usage. The consolidated budget expenditures will increase by 7.8% in 2014, 9% in 2015 and 6.8% in The pension maneuver realization will allow to decrease the transfers to the extra-budgetary funds by 22% in 2014 г. and 2-4% in that will give an opportunity to maintain rather high growth of the expenses for the national economy and the government investments (by 7-20% per year). The ruble weakening will lead to execution of the consolidated budget with surplus 285 billion rubles in Later the consolidated budget deficit will be -280 billion rubles in 2015 and -613 billion rubles in 2016 (-0.3% and -0.6% to GDP). Maintenance of the budget expenses on the level of 28-29% to GDP will require rather active policy of the government loans: the net government papers issue will be % to GDP per year, the foreign loans (minus repayment) % to GDP. The extra-budgetary funds income growth is forecasted as 3-12% annually in , the expenditures will increase by 6% per year. If the retirees number increases by 1-2% annually then the average pension will grow by 5%. The pension maneuver (that actually means the reduction of the transfers from the federal budget to the pension fund) will allow the government consumption to increase even under conditions of the new Finance Act that reduces the budget expenditures (relative to the previous version of the Finance Act). The ruble weakening will lead to the additional budget income and will give an opportunity to the public consumption increase. As a result, in 2014 the government consumption growth rate will be1.7%, in % per year. CONSOLIDATED BUDGET PARAMETERS FORECAST Incomes of consolidated budget, bln. rubles share of oil-and-gas incomes, % share of non oil-and-gas incomes, % Incomes of consolidated budget, % to GDP Oil-and-gas transfer, % to GDP Expenditures of consolidated budget, bln. rubles Expenditures of consolidated budget, % to GDP Deficit(-)/ surplus(+) of consolidated budget, % to GDP Net government paper issue, % to GDP Net external loans, % to GDP Cumulative volume (by the end of year) of the Reserve Fund and the NWF (accrued interests and currency difference are not included) Here the oil-and-gas transfer includes the current oil-and-gas incomes as well as means of the Reserve Fund used to finance the budget deficit. 7

8 Investment Pause in capital investment of the largest Russian corporations had a negative influence in large extent on economic development in In fact it is the slowdown in investment activity of the largest public state companies that determined the annual reduction total of fixed capital investment at 0.3%. But capital investment both of private sector and foreign companies experienced nominal growth. Thereby statistics demonstrated vulnerability of thesis about bad investment climate in Russia. Just that very investment controlled by the government was reduced in first place. The largest Russian corporations under conditions 2013 demonstrated superior management by financial streams in volatile macroeconomic situation. And evident problems with management quality by key assets for economy development and supporting of acceptable growth rates were found out by government. At the beginning 2014 negative trends in investment activity maintained. Investment activities in January-February 2014, growth rate in% to January-February Imports of investment goods, cost Production of Transport Equipment, index Production of Electrical and Optical Equipment, index Machinery and Equipment production, index Cement production, thousand t Production of reinforced concrete structures, thousand m3 Imports of investment goods, physical quantity Work in building, physical quantity New house buildings, mln m2 Fixed capital investment, physical quantity Fixed capital investment forecast dynamics is based on the assumption that in there is an intensification of investment activity. But with business as usual the intensification will be constrained with inadequate measures of crediting for capital investment and relatively low measures of budget means spent on investment. According to current scenario of budget expenditures the increment of budget investment will remain zero in 2014 and with a little minus in So the investment growth in is made mainly from private sector. Annual growth rate of its investment amounts to 3.4% in However, this amounts turn insufficient for significant growth acceleration and improvement of national manufactures competitive abilities on internal and external markets. Foreign trade and balance of payments In 2013 balance of current account was $33.0 bln., and it is $39.0 bln. less than in There is an apparent tendency toward cutting the balance. In 2013 volume of export increased by 3.8% and volume of import increased by 5.9%. Since 2000 (except 2009), volume s growth rate of import is higher than one of export. In 2013 export and import were 28.3 and 22.6% of Russian GDP, respectively. Recent years ratio of export to GDP decreased gradually, while ratio of import to GDP did not change significantly. In 2013 net export was 5.6% of GDP. It is the least value of net export since Export deflator was 98.6% in 2013 last time export prices fell in Average price of oil Urals was 107.9$/bbl in 2013 after 110.5$/bbl in previous year. According to custom statistics (it does not take into account trade with Belorussia and Kazakhstan), oil, oil products and natural gas formed 74.6% of Russian export. Share of metals in export was 7.9%, share of chemical products was 4.7%, and share of machinery was 3.2%. Structure of import was: machinery 49.6%, chemical products 16.4%, agricultural products and food 13.0%, metals 6.9%, and textile 6.1%. The forecast According to the forecast, volume of export will change insignificantly in (in 2016 its value is forecast as 101.9% to 2013 value). 8

9 The growth of import s volume will be more noticeable than export s: by 2016 its value is forecast as 109.3% to 2013 value. It is forecast that changes of export and import in current prices will be almost insignificant in in comparison with Current balance, $ bln Trade balance, $ bln Export, $ bln Import, $ bln Volume of export, % to previous year Volume of import, % to previous year Net export, % of GDP Monetary sphere Central Bank Last year and the beginning of the current characterized by strengthening the role of Central Bank lending to banks in order to provide the economy with money : the annual growth of loans to the banking sector increased from +0.8 to +2.1 trillion rubles in January January 2014 (50% - 85% growth year-to-year in January ). As a result, the Central Bank assets increased its growth rate from 10% to 17.7 % y / y in January January 2014, the growth rate of the monetary base in broad definition from 6.6 % to 10.9 % in the same period. It should be noted that the annual growth of CB foreign assets amounted to +0.9 and +1.4 bln. rubles in January January Nevertheless, the increase in Central Bank foreign assets in 2012 and years was under a different reasons : in 2012 the increase was due to the growth of international reserves (increase due to operations, ie immediately CB net purchases of the international currency, amounted to +30 billion dollars, due to revaluation and other changes +8 billion dollars), in the growth was nominal given an absolute reduction of international reserves 4 and on the background of the ruble rapid devaluation. Thus, the increase in Central Bank foreign assets of the last year and the beginning of the current was in fact the unrealized difference in foreign currency exchange revaluation 4 In 2013: net foreign currency sales by CB were 22 bln. dollars, due to revaluation and other changes - 6 bln. dollars. During two first month of the current year the volumes are 14 and 5.8 bln. dollars accordingly. and the saturation of the economy with money was provided by the CB lending to banks growth on the background of the budget accounts growth stabilization which are binding free liquidity (15% y / y in January of ). Credit organizations In early 2014 there was a significant increase in the business savings rate (its smooth annual level increased from 1.4 % to 3.2 % of GDP in December January 2014, fixed-term accounts rate increased from 1.3 % to 2.4 %, settlement accounts rate from 0.1 % to 0.9%). Since the middle of 2013 there was a decline in the households savings rate (the smooth annual level amounted to 6.5 % -5.5 % of revenues in July January 2014, taking into account the households investments in securities rate was 7.9 % % of revenues respectively), mainly due to the time deposits (5.5 % % of revenues). The ruble weakening didn t significantly affect the currency structure of households deposits, whereas the foreign currency business deposits increased continuously. As a result, the money supply in the national definition slightly reduced its growth rate - from 13.2 % to 12.7 % y / y in January accordingly, whereas its share in GDP increased from % in to 47% in 2013 (from 42% to 45 % y / y in January ); at the same time the broad money accelerated the growth rate from 13% to 16.7% y / y in January Despite significant growth, the share of the company's settlement accounts continues to decline relative to their fixed deposits. 9

10 During there were the increase of the deposits for a period from 1 to 3 years in the households deposits structure, and since the last year it was accompanied by a gradual increase in the share of long-term deposits (for a period over 3 years) due to the decrease of the short-term ones (for a period less than one year). This situation reflecting the households growing confidence to the banking system. The share of demand deposits remained stable, which characterizes the gradual growth of cashless payments. Credit institutions assets increased its growth rate from 17% to 22 % y / y in January It was the outstripping growth of Central Bank loans that caused this acceleration dynamics, whereas the others banks liabilities items shares remain stable or decreased in the total liabilities structure. As for banks assets, there was a decrease of lending to households and businesses shares and increase the foreign assets and government securities shares. Because of the outstripping growth of foreign assets in comparison with external liabilities, the banks net capital outflow amounted to 5.7 billion dollars in 2013 (in 2012 there was a net capital inflow amounted to 9.7 billion dollars). Household loans dynamics decreased from 39.2 % to 27.7 % y/y in January The business loans grew steadily at 14.7 % rate level in the same period. In the structure of households and businesses lending there is an increase of long-term (over 3 years) and short (i.e. demand and overdraft for households, up to 30 days for business) credits due to a steady decline in interest rates on over a 1 year loans and their stabilization on up to 1 year loans. It is worth noting remaining of housing loans high growth rates (30 % y/y in ) and continuous gradual decline of its interest rates. Provided households income growth reduction, housing purchase expenditures decreased by 2.5 % during the three quarters of Thus there is a housing loans growing importance in finance this type of expenditures and one can observe the shift of house purchases to the poorer groups of population. Accelerated growth of short-term business loans along with the observed slow growth of settlement account could reflect the liquidity problems of certain companies group (probably representatives of small and medium business). The demand for short money stimulates a significant increase in turnover on interbank loans for a period from 2 to 7 days, at the same time interbank rates are relatively stable, indicating the relative adequacy of liquidity on money market. Household loans overdue rate increased from 4.4 % to 4.9 % in In the household expenditures structure there is a decline in the savings share (and, marginally, the share of expenditures on goods) accompanied by a continuous increase of obligatory payments share, which could result in the continuous of the overdue debt increase. Business loans overdue rate decreases in general (from 4.6% to 4.3% in ), whereas there is a high heterogeneity of this index by industries. From this perspective the most problematic branches are: wood and products of wood products (overdue rate rose from 13.6 % to 21.1 % in ), pulp and paper production and printing (rose from 8.7 % to 13.5 % ), car manufacturing (9.6% % respectively), manufacture of food products (8.8 % %). Nevertheless, the combined share of these sectors in the total outstanding loans in 2013 amounted to only 5.6 %, in total overdue loans %. The trade sector overdue rate (6.4% - 5.8% in ) remains above the average rate, and thus the trade sector loans account for 20 % of total loans and 27 % of the total overdue loans. Agricultural enterprises (overdue rate is 7.2 % %) amounts to about 10 % of the total overdue loans. 10

11 Business loans by industry Industry overdue loan rate, % Industry share in the total business loans, % Industry share in the total business overdue loans, % Total mining and quarrying of natural minerals mining and quarrying of energy producing materials manufacturing food products, including beverages and tobacco wood and products of wood pulp and paper products, publishing and printing coke, petroleum products and nuclear materials chemicals other non-metal mineral products metals and metal products machinery and equipment agricultural and forestry machinery transport vehicles and equipment automobiles electricity, gas and water supply agriculture, hunting and forestry agriculture, hunting and services in these areas construction construction of buildings and installations transport and communications regular and irregular air transport wholesale and retail trade; repair services for means of transport, furnishings and private used goods real estate activities other activities for settlement finality

12 The forecast Central hypothesis of the current model version is national currency dynamics and appropriate external capital flows. It s supposed the ruble effective exchange rate weakness at 7%-4% level annually in accordingly. Banks foreign assets growth outgoes the banks liabilities one resulting in the bln. dollars of net banks capital outflow annually in the forecasting period. Named factors along with the forecasting foreign trade turnover volume and hypothesis of the outflow capital gradual decline from 42 to 25 bln. dollars in provide the international reserves stabilization at 535 bln. dollar level in Another main hypothesis is maintenance of the household savings rate declining in the nearest outlook (from 5.9% to 4.7% in ), thus it helps to extra support the consumption level. Business savings rate remains increasing dynamics up to 3.8% in the current year, and decreases down to % in being in the limits of its level. Named international banks position, savings rate dynamics and CB credits to the banks, forecasted to provide the economy demand on CB money under given international reserves volume, support the banking system assets growth from 80% to 87% GDP in Given this assets growth rate there could be provided the household loans growth from 16% to 19% of GDP and business loans growth from 34% to 37% of GDP. Net household loans growth increases from 2.6 to 2.8 bln. rubles, business loans one increases from 3.5 to 4.8 bln. rubles in accordingly. Household debt burden increases from 24% to 29% of revenues in MONETARY AND CREDIT SPHERE - FORECAST MAIN RESULTS * * all the data are given by the end of the named period Macroeconomic indicators International reserves of RF, bln. dollars Money supply (national) dynamics, % Monetary base (broad) dynamics, % Money multiplier Money supply (national) to GDP, % Currency to Money supply, % Banks assets to GDP, % Household loans to GDP, % of which Consumer loans to GDP, % Car loans to GDP, % Housing loans to GDP, % Business loans to GDP, % Household savings rate, % Household savings rate - fixed deposits, % Household savings rate - demand deposits, % Business savings rate, % Business savings rate - fixed deposits, % Business savings rate - settelment accounts, % RF payment turnover, bln.rub Central Bank Monetary base (broad), bln.rub of which, %: Banks other deposits in CB Required reserves deposits Currency issued Liabilities to general government, bln.rub Credits to the banking system from CB and/or government, bln.rbl Credit organisations Banking system assets structure, % Foreign assets Others deposits in CB and currency Required reserves deposits in CB Household loans

13 Business loans of which investments in equities and debt obligations Claims on general government Other assets Banking system liabilities structure, % Households deposits Business others deposits Business settelment accounts Liabilities to central bank Liabilities to general government Foreign liabilities Shares and other equities Other liabilities Foreign assets to foreign liabilities International investment position Assets, bln. dollars Liabilities, bln. dollars International investment position, net Price dynamics Food price index is a critical parameter that affects the overall dynamics of consumer prices in the country. Food prices not only have the greatest impact on the consumer price index, but also have the most volatile dynamics that differs greatly from year to year depending on a variety of market factors. So, in September 2013, the cumulative rate of food prices was lower than in the previous two years. However, over the last three months of last year, food prices have increased considerably, reaching a level in Year with a relatively low yield (about 64 million tons of grain). In 2013, the crop factor was offset by a good collection - about 95 million tons of grain. However, food prices soared, leading to significant growth and general consumer price index for the year reached 6.8%. The reason for this jump was the weakening of the ruble. This topic has become one of the most important and discussed in expert circles at the beginning of this year. But in late 2013, the situation was less clear. Especially because the dollar in September and October generally decreased. Nevertheless, most of the food imports come from the European Union and the euro rose from 43.7 rubles per euro in September 2013 to in November and in December. It should be noted that, according to Rosstat, the volume of imports of goods in 2013 amounted to just over $ 11 trillion. rubles. Of these, about 15% of imports of food products. Turnover of retail trade in food as well was trillion. rubles. Thus, about 15% of food retail make imported goods. Most likely due to the weakening of the ruble prices for fruits and vegetables. In October, November and December 2013 they were 103.6%, 103% and 102.8%, respectively (the previous period). In the first months of this year, when the euro jumped to 48 and then 49 rubles for one euro, growth in prices for fruits and vegetables increased to 105.8% and %. The forecast There was an ambiguous situation. On the one hand further depreciation of the national currency may lead to a further increase in food prices. On the other hand, a further acceleration in food inflation (and this has happened recently) can cause a redistribution of consumption towards non-food items. In favor of the latter indicates the current situation: falling interest rates on loans, relatively low levels of inflation for non-food products and slowdown in organized savings. The situation described would be a deterrent to rising food prices, and that will reduce the overall consumer price index. According to our forecast, he will make this year of 6.3%. Consumer incomes and household consumption Economic results of 2013 are disappointing: the minimum GDP growth almost stagnant industry 13

14 and negative dynamics of the capital investment. Against this backdrop, incomes and consumption looks good, despite the significant slowdown in their growth. Thus, the growth of real wages in 2013 amounted to 5.2% (against 8.4% in 2012), the retail trade turnover - 3.9% (vs. 6.3%). Nevertheless, in late 2013 in the consumption of certain positive changes. Growth rate of loans to households, which declined throughout 2012 and early 2013, ceased to decelerate rapidly and reached the level of about 22% compared to the previous year, in which they have held more than half of This led to the fact that the annual dynamics of retail trade turnover consumer goods also ceased to decline. In addition, since September began to decrease growth of organized savings. Dynamics of retail trade turnover consumer goods and deposits currency. Some positive contribution to the domestic economy, coupled with the obvious increase in ruble earnings export-oriented industries, takes place. But too sharp rise in imports may adversely affect the Russian economy. About half of the import goods are machinery and equipment. Meanwhile, from the perspective of consumer appreciation of foreign currencies in the short term, lead to higher consumer prices, and, mainly food. Given the above situation on the market of non-food products that would reduce the consumption of food. At the same rate of income growth will continue to slow. Thus, the growth rate of household consumption in the current year will be significantly lower than in According to our forecast, they will be around 2.7%. I - deposit growth I - dynamics of retail trade turnover consumer goods However, the availability of consumer loans also increased markedly: in early 2013 the weighted average interest rate on loans (CB) over one year was 21.7%, while in December it had fallen to 18.3%. As a result of the dynamics of retail trade turnover consumer goods decreases, at least about two years to reverse this trend and began to increase. Given the fact that in recent years it is household consumption was one of the main drivers of economic growth, improvement in this area is a good sign. Meanwhile, one of the most pressing issues of the current year is the weakening of the national Labor force and demography According to the results of the previous year the employment was ths. people (the year before the value was ths. people). The low reduction of employment was fixed in January 2014 by 300 ths. people in annual terms. The unemployment saved at the level of the previous year 4100 ths. people. In January there was the value decreasing by 300 ths. people in annual terms. The number of people leaved for personal reason was still high (27.9% in December and 26.5% in January) in unemployment structure. The described labor market tendencies confirmed that the current economic delay could be explained by the growth reserves exhaustion, in particular owing to the labor force deficit. Actually under the account conditions the economy still produced higher labor demand (the number of vacancies in January 2014 was on the level of the previous year) simultaneously the number of economically active population declined (in January by 600 ths. people lower than the value of the similar period the year before). The labor force deficit could be overcomed by two essentially different directions. The first one consists in engaging the additional labor force from the various sources (the economically 14

15 inactive population and structural component of unemployment). The second one occurs owing to labor productivity increasing. Particularly in current conditions the most efficient method of labor productivity increasing could be the labor market optimization by the example of crisis. The policy of extra employment exemption could be favorable for economic expenditures by increasing the labor productivity and improving the labor costs. Obviously such situation is connected with growth unemployment risk. The increase of unemployment and simultaneous fixation the tendencies of personal incomes decreasing (the growth of real wages in January 2014 was 102.5% in annual terms).could limit the consumer expenditures and therefore put down the household consumptions contributed in economic growth. The opposite effect could be achieved if the productivity growth would gain the competitive ration with the growth of labor compensation (as a result of labor market optimization). Until the period under review the labor market tendencies were hardly optimistic the decreasing of employment and simultaneous the unemployment decreasing testified the intensity connected with labor force deficit. The main restriction of the labor productivity increasing could be the drop in national currency rate, as a result the delay of the production capital renovation. The forecast According the model calculation the value of employment will achieve ths. people in The employment of 2014 will be at the level of the previous year, as a result the most labor productivity growth will be in 2014 amount 102.6%. Under the conditions of the moderate economic growth the unemployment will decline providing the labor force supply for employment increasing. The level of it will be 5.3% (or 4000 ths. people) in MAIN CHARACTERISTIC OF LABOR FORCE AND EMPLOYMENT, average a year, mln. people Total population Population of working age Economically active population Employment Unemployment (the unemployment rate), % The labor productivity, % Labor demand Economically inactive population of working age Population older the working age GDP production account The GDP growth was 101.3% in 2013, at the same time the capital investment growth was 99.7%. Under the assumption of the gross value added dynamic largely correlates with the production dynamic of the corresponded economic sectors in the short-time period we examined the production indices. According to the results of the year the growth rate of the manufacturing industries production was 100.5% (in January-February it was 100.8% in annual terms), in extracting industries the production growth was (in January-February 100.9%), in agricultural sector the value of production increased by 6.2% in 2013 (in January it was 100.8% in annual terms). The retail production increasing was 3.9% in 2013 due to continue of the household incomes growth. The extremely moderation was observed in construction sector (in which the correlation with the investment activity is notably strong): the growth rate was 98.5% in 2013, 94.6% in January in annual terms. We examined the smoothed mounts production indices of the economic activities and fixed that the situation in extracting industries was the most stable and favorable at the period under review. It 15