Publication: Monitor Volume: 7 Issue: 160

Growing investment demand is helping the engineering branches of Russia’s industry fare better than anticipated this year. Gross investment in fixed capital increased by 7.8 percent year-on-year in July to bring the growth in the cumulative figure for the first seven months to 5.4 percent. While that pace is less than one-third of the 16.9 percent registered a year earlier, growth in output of machine-building and metalworking in the first seven months of the year still came to 9.7 percent. Output in this branch has been buoyed by strong boosts in production of construction and agricultural equipment and electrical machinery as construction activity strengthened. On the other hand, production of metallurgical equipment, automotive equipment, machine tools, telecommunications equipment and precision instruments have all lagged last year’s results in the first seven months.

As in the case of consumer goods, the stronger ruble has also helped push up imports of engineering products. Imports of engineering products from outside the CIS were up 52.1 percent in July 2001 from a year earlier (Goskomstat, August 2001). That increase reflects not only stronger Russian demand for investment equipment in light of the stronger ruble, but also significant demand for imported components on the part of those domestic manufacturers of lines of investment equipment that are meeting with success on the Russian market. For example, while Russian producers of specialized construction machinery have seen domestic orders increase, they have been required to equip their models with Western components in order to stay competitive.

The recent solid growth of gross fixed capital investment came despite the relatively slow growth of profits reported by Russian enterprises this year compared to 2000. Gross fixed capital investment has accelerated in recent months, though rising ruble costs have trimmed increases in aggregate enterprise profits in the first half of 2001. Total enterprise profits (which are calculated by Goskomstat excluding small businesses, agricultural enterprises, financial and budgetary institutions) more than doubled in the first half of 2000 year-on-year, but in January-June 2001 they were up only 2.0 percent. Outside of the industrial sector, however, enterprise profits were actually sharply higher in the first half: They rose in construction by 38.6 percent, in transport by 16.9 percent, in communications by 39.1 percent and in the trade sector by 32.6 percent. In contrast, aggregate profits of industrial enterprises fell 11.8 percent in the first six months of this year from the year-earlier period (Goskomstat, August 2001). In addition to the impact of weaker demand for industrial exports and stronger competition from imports, industrial enterprise profits were squeezed by stiff increases in relative prices of electric power and freight transport over the period. Nonetheless, because the increase in the costs of power and transport services reflected upward adjustment of administered prices toward cost-recovery levels, their impact on enterprise profits essentially represented a reduction of subsidies to industry from the state budget in the first half of 2001.