Russian Economy Under Protracted Stagnation Threat

13.10.2009 — Analysis

The Mid Urals economy has passed the acute stage of the crisis, since the summer there is growth in the amount of money deposited by individuals and companies in banks, production volumes of some metallurgic plants have reached the pre-crisis levels. The bankers, however, are raising the alarm that the amounts of "bad" debts have reached threatening levels. The RusBusinessNews observer has established that the lack of understanding between the financial and real sectors of economy may turn into a protracted stagnation in the Russian economy.

Alexei Filippov, the Managing Director of OAO Kamensk-Uralsky Metallurgical Works, made an announcement at the Congress of Industrialists and Entrepreneurs of the Sverdlovsk Oblast that in June the company had reached the breakeven point and in September the workload of the production capacities had reached the pre-crisis levels.

Melik Mori, the Executive Director of OJSC Pervouralsky Novotrubny Zavod (Pervouralsk New Pipe Plant), said that the acute stage of the crisis is over and that the real sector companies have adapted to the new conditions. Managers, however, are aware that it does not matter how much you talk about the crisis being at its lowest, it will not go away by itself. In other words, we have to do something if we don't want to drown in its stormy waters. 

The Urals industrialists are going to focus their efforts on making high quality pipes and semi ready products for the aircraft industry, processing industrial waste, and establishing innovation companies. Of course, entrepreneurs are counting on banks and the Government to see the real value in their projects and finance the modernization of production capacities.

Valentina Muranova, the Chair of the Urals Banking Union, in the meantime demonstrated figures proving that financing of the real sector is on a drastic decline - in 2008 industries received 1.03 trillion roubles and in the first eight months of the current year - only 466 billion roubles. Lack of availability of finance is due to the fact that industrial companies' revenues in the first half of 2009 were 30% down compared to 2008. Payments overdue have grown twice having reached 41 billion roubles. There is little chance this will be paid back as there is no demand for industrial products. Mrs Muranova reckons that loans will not help here, proprietors need to invest into the modernization of production capacities.

In the meantime the renovation of the Urals economy is happening very slowly. According to the data provided by Viktor Koksharov, the Chairman of the Government of the Sverdlovsk Oblast, the proportion of innovative products in the Urals does not exceed 10-11%. Some isolated elements of the innovation economy are there in the machine building, pharmaceuticals, construction materials manufacturing, instrument engineering, but there is still no connection between the academia and production. Authorities are focusing their efforts on the development of technoparks, technical centres, and clusters to rectify the situation.

However, Vladimir Lopatin, the Director of the Russian Scientific Research Institute of Intellectual Property, doubts whether these efforts are going to yield the desired result. According to his data more than one trillion roubles has been spent in the country on the innovation infrastructure but the innovation economy has yet to be created; everything ends onсe the budget funds are spent. Federal and regional budgets spend 300 billion roubles a year on science and research work. In return we get reports which are not used anywhere. No more than 5-7% of the developments are patented, even fewer are commercialised.

By 2015, the expert says, the international division of labour in the sphere of nano- and biotechnologies, which are shaping the future, will end. 134 billion roubles is allocated in Russia for the development of these spheres. However, the lion's share out of more than two thousand patents issued by Rospatent in the sphere of nanotechnologies is held by foreign developers (2 thousand) and only 30 - by Russian patent holders. Mr Lopatin asserts this means that the entrepreneurs of the Sverdlovsk Oblast will have to enter a licensing agreement with foreign companies which have patented their technologies in the region.

It is not hard to deduce that the times when small companies and large holdings did not have licensing agreements with domestic developers of innovative technologies will become a thing of the past. This is because foreigners do not go around handing intellectual property out for free and if the intellectual property rights are infringed upon, their actions are very severe - up to confiscating the profits and the goods as being pirated.

The expert is convinced that Russia has to put the intellectual property to good use, the laws on venture capital investment and double-purpose technologies have to be adopted as without them talking about production modernization and the establishment of the knowledge economy makes no sense.

The bankers are also suggesting that improvements to the legislation are needed. According to Valentina Muranova it is not only the lack of demand for industrial products that causes debts to banks to grow. Very often the manufacturers do not pay on purpose. According to the bankers' data 553 insolvency applications have been submitted to courts in 2009 and only two of them were filed by banks. Debtors often initiate the bankruptcy proceedings themselves. Mrs Muranova reckons this is how industrialists attempt to delay the debt repayments. The Urals Banking Union has come up with a proposal to amend the bankruptcy law in this connection, to rule out the bankruptcy option in cases when the debtor has enough property for the performance of obligations.

Industrialists are not paying for the use of power either - according to the data provided by Denis Pasler, the Head of the Retail Operations of IES Holding in the Sverdlovsk Oblast, the debt of companies to OJSC Sverdlovsk Energy Sales in the three quarters of 2009 has amounted to 746.8 million roubles. He proposes his own recipe for the reduction of arrears having fixed the electricity price at the time of signing the contract. In Mr Pasler's opinion this will help eliminating the effect of the free market varying prices on activities of an enterprise.

Manufacturers, in the meantime, are counting on help from the Government. Mikhail Khodorovsky, the Director General of ZAO Sinara Group, suggested compensating a part of the interest payments having applied this practice to loans received in 2006-2007. Spending on research and development, in the expert's opinion, should be included in the product's cost of manufacturing and grant privileges when purchasing technologies. A more serious governmental help is needed in the issues of training qualified personnel for the industry - the education system has to be changed, insists Mr Khodorovsky. The conditions must be created for the immigration of specialists which will require active construction of housing stock to let and the provision of high quality healthcare. The latter goal, the manager reckons, is the number one priority in today's Russia.

Incidentally, both industrialists and bankers understand very well that none of the goals mentioned can be achieved overnight. This is why Valentina Muranova will be asking the Russian Central Bank for permission to restructure the existing debts in 2010 too. Ceasing this practice on 31 December 2009 may lead to the second wave of the crisis.

Bankers think that the bad debt problem has to be given maximum attention, otherwise a situation might be provoked similar to what happened in Mexico, Japan, Argentina, and Indonesia. At the times of local financial crises these countries had not managed to find an antidote to loan repayment defaults and their banking sector had hit the rock bottom. A similar situation in Russia threatens with a protracted stagnation of the economy.

Vladimir Terletski