Business Environment Russia Ukraine

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Business Environment

of Technology Industries

in Russia and Ukraine

Comparative research

Kseniya Balueva


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Foreword

Russia is the fastest growing market in the regions bordering Finland and the European

Union, and the economic integration between Finland and Russia is expanding continuously.

Therefore Russia is becoming more and more important for the development of business and

competitiveness in Europe in the near future. Russias unused potential for science, industry and

services offers totally new business opportunities for companies. Foreign investors interest in

Russia is again reviving, but the lack of a realistic picture of the market is still an obstacle to the

realization of projects.

This report examines the development of Russian technological industry in comparison

with that of Ukrainian. Ukraine and Russia began the market transition with broadly similar

institutions, industrial structures and levels of technology, and the economic reforms implemented

in the two countries were also similar, although Ukraine was reckoned to lag behind Russia

in many areas. The main difference between them is Russias far greater resource wealth. It followsthose differences in industrial development since 1991 may to some degree be attributable to

differences in initial natural resource endowments. In short, Ukraine could provide a rough

approximation of how a resource-poor Russia might have developed over the transition.

This report provides official and up-to-date information about business environment and

economic background of analyzed countries. Data about labour costs and average working hours in

comparison to the same key figures in European countries shows the picture of Russian and

Ukrainian labour markets. Information about technology industries such as output, export and

imports between Finland and Russia, Finland and Ukraine provides picture of international trade

development of industry. After reading one can understand what is really happening in Russia and

Ukraine. And that was the main goal of the work I did.

Finland, June-August 2007

Kseniya Balueva

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Table of content

Introduction ..........................................................................................................................................4

Geography and Resources............................................................................................................5Russia by regions .........................................................................................................................5

Economic trends and backgrounds ......................................................................................................7

Growth and International integration...........................................................................................7

Industrial production ..................................................................................................................12

Fixed Investment........................................................................................................................14

Private consumption...................................................................................................................16

Education system .......................................................................................................................17

Taxation .....................................................................................................................................20

Business condition .............................................................................................................................23Labour Market............................................................................................................................23

Availability of skilled workforce .......................................................................................23

Wages, Labour cost and working hour ..............................................................................26

Productivity................................................................................................................................33

Infrastructure..............................................................................................................................35

Research and Development........................................................................................................39

Development of technology industries ..............................................................................................44

Metals.........................................................................................................................................46

Mechanical equipment, electronic and electrotechnic (excl transport equipment)....................52

Information Technology sector..................................................................................................56The Finnish technology industries operating in Russia .....................................................................57

International trade. Russia, Ukraine and Finland.......................................................................57

Finnish overseas subsidiaries.....................................................................................................63

Summary ............................................................................................................................................65

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Introduction

The modern Russian state can be traced back to at least the 10th century, when the political

entity, known as Kievan Rus, was established in Novgorod. Also, Christianity (Greek Orthodox)

became the state religion at that time under Vladimir. As regards modern history, Russia wasgreatly influenced by Europe under the reign of Peter the Great (1689-1725), whose modernisation

policy made European influences spread across the country. The country's capital was also moved

westward from Moscow to St. Petersburg. Further reforms and Westernisation were also pursued by

forthcoming Tsars like Catherine the Great (1762-96) and Alexander I (1801-1825).

Upon entering the 20th century, following defeat in the war with Japan (1904-05) and the

ruinous effects of the First World War, coupled with economic and other internal pressures, the

March uprising in 1917 led to the abdication of the throne by Tsar Nicholas II. The revolution in

November that year, led by the Bolshevik Party under Vladimir Lenin, marked the beginning of the

Soviet era in the country.

The break-up of the former Soviet Union opened a new era in the Russian history at the

end of the century. Russia, now formally known as the Russian Federation, became an independent

state again in 1991. The Russian Federation inherited the permanent seat of the Soviet Union

(USSR) on the UN Security Council, as well as the bulk of the Union's assets and debts. Boris

Yeltsin was elected as the first President of the Russian Federation.

The country then embarked on a series of reforms to transform the former centrally-

planned economy to a market-oriented system through liberalisation and privatisation, which led to

the lacklustre economic performance of the country in the early part of the 1990s. Compounding the

problem, the country suffered from political turmoil during the Yeltsin era. While corruption and

gangsters were severe problems, political chaos was brought about by the frequent sackings of

government officials by Yeltsin. Further, although the economy registered positive growth in 1997

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for the first time in the 1990s, it contracted again in 1998 amid the outbreak of financial turmoil in

the country following the financial crisis in Asia.

Yet the country has been able to bounce back from the economic downturn since 1999.

Most importantly, the victory of Vladimir Putin in the presidential election held in March 2000 put

an end to Russia's long-standing political turmoil. Now both the political landscape and economic

environment have become more stable, while efforts to reform the economy have continued. These

have brightened the country's prospects, paving the way for a sustainable economic growth in the

medium term.

Geography and Resources

Russia is a vast but sparsely populated country. It has a population of over 140 million,

residing in a large territory of 17,075,200 km2 lying across the European continent and Northern

Asia, stretching from the borders with Estonia, Latvia, Belarus, Ukraine and Turkey in the west,passing Kazakstan, Mongolia and China to reach the Pacific Ocean. It takes over eight hours by

plane to fly from Moscow to Vladivostok on the Pacific coast.

Russia's geographical location presents a significant obstacle to development - dry or cold

climate, terrain, distance and remote location from major sea ports. As a result, a large part of the

territory has almost no population and development. For instance, the Russian Far East in Siberia is

a largely uninhabited area covered by coniferous forest, swamps and tundra in the north and

mountainous terrain in the south. Over 70% of the population lives in urban areas.

Russia by regions

Russia is a multiethnic society. The largest ethnic groups include Russians (82%), Tatars

(4%), Ukrainians (3%), Chuvash (1%), Bashkir (1%), Byelorussians (1%), Moldavians (1%), etc.

While Russian is the country's official language, it is also the mother tongue of over 80% of the

population. Other languages are used in ethnic minority regions. The major religions in the country

include Russian Orthodox, other Christian denominations, and Islam, although some others like

Judaism and Buddhism can also be found across the country.

Administratively, the Russian Federation is divided into seven Federal Districts. They are

Central (with Moscow being the centre), North West (St. Petersburg being the centre), South

(Rostov-on-Don being the centre), Privolzhsky (Volga) (Nizhny Novgorod being the centre), Urals

(Yekaterinburg being the centre), Siberian (Novosibirsk being the centre) and Far East (Khabarovsk

being the centre).

The country has 1,095 major cities and towns, but with less than 15 of them inhabited by

one million or more people each. The largest cities are Moscow, St. Petersburg, Novosibirsk,

Yekaterinburg and Nizhny Novgorod.

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10,407

4,6

1,406 1,304 1,289 1,143 1,133 1,11 1,095 1,058 1,036

0

5

10

15

mln people

1

Population in Major Cities in Russia (2006)

Moscow St. Petersburg Novosibirsk Yekaterinburg

Nizhny Novgorod Omsk Samara Kazan

Chelybinsk Rostov-on-Don Ufa

Moscow, the capital and the largest city of the Russian Federation, is the country's principal

economic and political centre, and the seat of the President, the government and the State

Duma (Parliament). The city also engages in a variety of industrial activities, such as

manufacturing automobiles and trucks, machine-tools, electrical gadgets and instruments,

chemicals, textiles and foodstuffs.

St. Petersburg, the nation's second largest city, is another important cultural, research and

industrial centre in Russia. Thanks to its geographic proximity to other West European

countries, St. Petersburg plays an important role in Russia's international business. It is also

Russia's most important port in the Baltic Sea.

Novosibirsk, the third largest city in Russia and the largest in Siberia, is a transportation

hub on the back of the crossings of the Trans-Siberian railway bridge and the Turkistan-

Siberia Railway. Major industries include Machine manufacturing and metallurgy.

Yekaterinburg is a major centre for heavy transport and chemical engineering industries,

and non-ferrous metal works.

Nizhny Novgorod has the biggest automobile manufacturing centre in Russia.

Rostov-on-Don specialises in aerospace, agriculture, electronics and electrical appliances,

tobacco, etc.

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Economic trends and backgrounds

Growth and International integration

Russia's economic reforms have made considerable progress since Mr Putin became

President in 2000; although large and corrupt bureaucracy still remains an obstacle to the reform

implementation. But a booming domestic market continues to drive strong economic growth in

Russia. Substantial net capital inflows have now joined receipts from resource exports in fuelling

domestic demand. In this context, the pace of economic growth has accelerated since the second

quarter of the year 2006. Annual GDP growth could reach 7.0 percent. Fixed capital investment and

FDI have also exhibited impressive growth. The economic expansion continues to be concentrated

primarily in non-tradable sectors of the economy that have profited from a stronger ruble.

Stagnating production, high investment needs, and rapidly-growing domestic demand are raising

increasing concerns about the state of the Russian energy sector.

Russian GDP growth and the surplus/deficit in the state budget are closely linked to world

oil prices. The GDP growth rate was 7.2% in 2004, slackened to 6.4% in 2005, than tendency get

back and GDP achieved the rate 6.7% in 2006 and is estimated to have declined to 6.3% and 6 in

2007 and 2008 respectively.

Figure 1.1

Average Change of GDP(% on previous calendar year)

0

5

10

EuroZone Ukraine Russia Finland

EuroZone 3,5 1,8 0,9 0,8 1,8 1,5 2,8 2,5 2,2

Ukraine 5,9 9,2 5,2 9,6 12,1 2,7 7,1 5,9 6

Russia 7,8 5,1 4,7 7,3 7,2 6,4 6,7 6,3 6

Finland 5,4 0,9 1,6 1,9 3,5 3 5,5 2,9 2,4

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Consensus Forecasts (ISSN: 0957-0950), Eastern Europe Consensus Forecast (ISSN: 1462-4001)

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Comparing with Ukraine and Finland, Russian average change of GDP performed more

stable in period from 2000 to 2006. Average change of GDP in Ukraine, after it dropped down to

2.7% in 2005, has speeded up to the rate of 7.1% in 2006. And look-ahead rates of average change

of GDP in Ukraine are approximately equals to Russian ones for the same period. Countries of Euro

Zone showed positive growth in the interval from 0.8% (in 2003) to 2.8% (in 2006). If you look at

the figure carefully you could see the agreement in trends of average change of GDP in Finland andother countries of Euro Zone. It showed some positive growth during the period from 2002 to 2006

and estimated rates for next two years slacken its pace.

After comparing the tendency in annual changes of GDP we can look more carefully inside

the country. Net increase of GDP per capita in Russia from 2000 to 2006 was 3920 mill EUR (66%)

The same measures for Ukraine show net increase about 3100 mill EUR (82%).

Figure 1.2

GDP/capita

(EUR at PPP - wiiw)

59706440

69407510

82809040

9890

37704250 4630

5130

5930 6260

6870

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003 2004 2005 2006

Ukraine Russia

Source: wiiw Database incorporating national statistics; wiiw forecasts.

Higher-than-expected economic growth has helped absorb the rapid money expansion

related to foreign inflows. RosStat agency has reported that Russia's CPI inflation decelerated to

0.6% month over month in March from 1.1% in February. On the yearly terms the CPI slowed to

7.3% year over year versus 7.6% in February and 10.6% in March 2006

.

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Table 1.1 CPI, RussiaMonth over June

month 2007. July

December 2006.

2006. December2005.

JulyJune

101 106,6 106,9100,9CPI

among them

Goods 101,1 105,3 105,7100,9

101,7 107,6 108101,4food products

100,3 102,6 102,7100,4nonfood products

100,6 110,5 110,7100,6Services

Source: CBR

Figure 1.3

Inflation, consumer prices

0

100

200

300

Russia Ukraine

Russia 100 121,5 140,6 159,9 177,3 199,7 219,1 236,8 254,5

Ukraine 100 112 112,8 118,7 129,4 146,9 160,2 178,2 196

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: World Bank national accounts data, and OECD National Accounts data files.From the figure bellow it can be understood that changes of inflation rate in consumer

prices has similar tendencies in Russia and Ukraine. Variance of inflation in Russia and Ukraine is

equal to 58,9 in 2006 and according to forecast it will maintain the same value 58,6 and 58,5 in

2007, 2008.

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Figure 1.4

Inflation, GDP deflator (annual %)

0

10

20

30

40

2000 2001 2002 2003 2004 2005

European Monetary Union Finland

Russian Federation Ukraine

Source: World Development Indicators database

Annual GDP deflator is another way of estimating inflation rate. European Monetary

Union and Finland demonstrated lower level of inflation than Russia and Ukraine. Changing of

GDP deflator in Russia and Ukraine shows the same trend during period from 2000 till 2005.But if

in 2000 the variance between inflation rates was about 15 points, then in 2005 it shows the same

value 20%.

According to data from the end of March of 2007, foreign capital in Russian economy

reached 151.5 bill. USD, it was 33.1% higher than in the same period of previous year. Biggest

share in foreign capital was other investment, on returnable base such as credits from international

organisations and trade credits 50% at the end of March of 2007 (51% - end of March 2006) ,

share of foreign direct investment was 48.2% in March 2007 and 47.4 at the same period in 2006;

share of portfolio investments 1.8% (1.6%)

Figure 1.5

Foreign direct investment, net inflows

(BoP, current US$)

0,00

5000000000,00

10000000000,00

15000000000,00

20000000000,00

2000 2001 2002 2003 2004 2005

Finland Russian Federation Ukraine Source: World Development Indicators database

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Figure 1.6

Foreign Direct Investment

Russia

0

5000

10000

15000

20000

25000

2000 2001 2002 2003 2004 2005 2006

FDI inflow, EUR mn FDI outflow, EUR mn


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Industrial production

Russian industry exhibited somewhat more rapid growth (4.3 percent) in the first 10

months of 2006 than during the same period in 2005 (3.7 percent). Within industry, energy and

utilities have exhibited higher growth than in 2005, while the expansion in manufacturing has

continued to slow down.

Table 1.2 - Output Growth by Sectors, Russia: 2005-2006

Jun-Oct2005

Jun-Oct20062005

Agriculture 2,40 2,20 1,30

Logging -6,00 -5,70 -7,30

Extraction of internal resources 1,30 1,10 2,20

Manufacturing 5,70 5,30 4,70

Electricity, gas, water production anddistribution 1,20 1,20 5,10

Construction 10,50 9,00 13,20

Retail trade 12,80 12,60 12,50

Transport 2,50 2,50 2,50

The rapid real appreciation of the Russian ruble (8 percent in the first three quarters of

2006) and double digit increases in real labour costs continue to challenge Russian firms in

competition on international markets. Machine building as a whole has not fared well in 2006. The

production of machines and equipment has stagnated (0.5 percent growth in the first 10 months of

the year), while the production of electro-technical equipment has fallen (-1.5 percent growth).

Chemicals grew at only 1.2 percent. Growth in most other sectors of manufacturing wasstronger. Several industries reported increases in their growth rates for the first ten months of 2006

relative to the same period of 2005. Metallurgy continued to exhibit strong performance, growing at

10.2 percent. The food industry (5.3 percent), coke/oil processing (6.0 percent) and cellulose-paper

and publishing (6.8 percent) also exhibited higher than- average growth in manufacturing. The long

decline in light industry may have finally bottomed out, with rapid growth reported in textiles and

sewing (7.8 percent) and the production of shoes and leather products (13.2 percent). Plastic and

rubber products also expanded by an estimated 11.1 percent. Textiles, sewing, plastics, and rubber

products together account for only 4 percent of manufacturing, however, and their growth is from a

very low base.

Increasing attention has focused on the Russian gas and electricity sectors, where acombination of rapidly growing demand, stagnating supply, and the depletion of existing fields

have raised prospects of additional price increases and possible future shortages. The government

has acknowledged the seriousness of the situation, and recently approved a package of measures to

increase domestic gas prices and promote the more rapid growth of alternative energy sources

(nuclear and coal) for electricity. Against this backdrop, there has also been a certain revitalization

of discussions for introducing more competition into the gas industry, particular in gas production,

as several oil companies have unrealized potential for producing gas. Under the most recent plans,

the government will increase domestic gas prices for enterprises by 15 percent in 2007, and between

25-27 percent annually from 2008-2010. Relative increases in gas prices are projected to continueuntil the profitability for domestic sales and exports is equalized. This does not imply the

equalization of Russian and EU tariffs net of transportation costs, however, as the Russian

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government can use the gas export tax to regulate the profitability of exports. This is a valuable

tool, given the fact that export gas prices include rents that Russia receives due to its market power

in natural gas. The question of providing sufficient investment in gas and electricity over the

medium term remains one of the most critical questions for Russias future development. Russias

cautious attitude toward foreign investment in the energy sector increases the share of this needed

investment that will most likely need to be financed internally through higher tariffs or other means.Higher energy tariffs may become another increasingly limiting factor in the expansion of Russian

manufacturing.

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Fixed Investment

The question of providing sufficient investment in Russian economy over the medium

term remains one of the most critical questions for Russias future development.

Figure 1.7

Gross fixed capital form. Russia, EUR bn, nom.

47,40

64,13 65,2270,18

87,42

109,37

140,58

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006

Gross fixed capital form., EUR bn, nom.


Figure 1.8

Gross fixed capital formation

Russiaannual real change

annual change

in % (real)

0,0

5,0

10,0

15,0

20,0

2000 2001 2002 2003 2004 2005 2006 2007 2008


Given Russias needs in capital and modernization, the government has placed a high

priority on increasing fixed capital investment rates beyond the current 19 percent of GDP. 2006

has witnessed at least some important progress on this front. Fixed capital investment growth

accelerated to 12.6 percent during January-October 2006, as compared to 9.9 percent growth in the

first 10 months of 2005. Inflows of direct foreign investment increased by an estimated 55 percent

during the first three quarters of the year, and reached US$ 10.3 billion. Along with high profits in

the energy sector, the strong ruble and booming domestic market have helped make Russiaincreasingly attractive to private investors.

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Figure 1.9

Gross fixed capital form., EUR mn, nom.

Ukraine

66,4783,54 86,06 91,42

117,74

146,10127,59

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006

Gross fixed capital form., EUR mn, nom.


Figure 1.10

Gross fixed capital formation

Ukraineannual real change

annual change

in % (real)

-5,0

0,0

5,0

10,015,0

20,0

25,0

2000 2001 2002 2003 2004 2005 2006 2007 2008


In Ukraine in 2005 the growth of real gross fixed capital accumulation was negative for

the first time since 1996. It dropped by 0.3% against the background of high statistical base,

ambiguity concerning property rights in the country provoked by revision of the earlier privatisationsettlements, and high political uncertainty. In the beginning of 2006 the investment activity remains

rather sluggish due to high political uncertainty associated with parliamentary election of March

2006 and the change in the procedure of Cabinet of Ministers formation due to constitutional reform

that came into force in January 2006. However, later during year investments are expected to

revive, as increased gas price and higher competition both on domestic and external markets will

push enterprises for restructuring. In 2006 the real gross fixed capital accumulation is forecast to

grow by 6.2%. In 2007 investments are expected to significantly accelerate as some investment

plans postponed in previous years will be realized. One particular need for investments will be

energy-saving technologies allowing reducing gas consumption. The real gross fixed capital

accumulation is expected to increase by 15.1% in 2007.

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Private consumption

The strong economic performance is also seen in increasing consumption in Russia. As

real income has increased, households consumption has annually grown by about 10 % in average

during this decade. The increase in purchasing power is reflected also in a fast growing service

sector. The middle class is growing and western style consumption habits are becoming more

popular. The improved economic situation is also seen in the regions. It is not only Moscow and St.

Petersburg, where welfare is improving, but the purchasing power is also increasing in the regional

centres.

Figure 1.11

Private Consumption

0

5

10

15

20

EuroZone Ukraine Russia

EuroZone 2,8 1,8 0,9 1,2 1,4 1,5 1,9 1,8 2

Ukraine 11,1 8,7 5,5 12,4 13,5 16,6 16,6 13 11,1

Russia 9,3 9,5 8,5 7,5 12,1 12,7 10,7 10,6 9,5

2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Consensus Forecasts (ISSN: 0957-0950), Eastern Europe Consensus Forecast (ISSN: 1462-4001)

Strong growth of private consumption was the major contributor to the real GDP growth

since 2001 for Ukraine. It is expected that the final consumption of households will remain the keydriving force for real GDP growth in 2006 as well. It will be supported by further increase in

incomes, however at the lesser extent than in 2005, thanks to the continuation of expansionary

social and wage policy. Also, development of consumption-oriented micro-crediting will build

additional financial foundation for growth of consumption. As a result, in 2006 real final

consumption of households will increase by 16.6%. As the most of households consumption

growth is attributed to higher demand for non-food products and services, in particular

telecommunication, recreational activities and health care, the deterioration of industrial

development will have minor impact on private consumption.

In 2007 the growth of households final consumption is expected to be more moderate at

13%. There are several factors behind this forecast, including an increase in personal income taxrate from 13% to 15%, the expected deceleration of social and wage policy expansion, and re-

allocation of value added from wage bills to profits and thus investments.

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Education system

The Russian educational system may be arranged into three major groups: secondary education,

higher education and postgraduate education.

Secondary school

Secondary education in Russia takes either ten (skipping the 4th form) or eleven years to complete,

depending on the school. After graduation from the 9th grade, which is compulsory for all Russian

citizens, a pupil obtains a Certificate of Incomplete Secondary Education. After that a pupil has to

choose one of the following ways to complete his secondary education: to continue education for

two more years at the secondary school or to pursue an associate degree at a Community College.

The latter variant usually takes three to four years to complete but provides a pupil with educational

qualification that is sufficient for most blue-collar jobs.

University

Figure 1.12

Graduates in tertiary* education, Thousand

3054; 37 %

1843; 22 %

1067; 13 %

431; 5 %

1405; 17 %

472; 6 %

EU27 USA Japan Brazil Russia Ukraine

*International Standard Classification of Education (ISCED)

Source: UNESCO Institute of Statistics

Russia has more academic graduates than any other country in Europe. After obtaining a Certificate

of Complete Secondary Education a student can enter a University or a Community College. At a

Community College students with complete secondary education can obtain an Associate Degree in

one or two years. A student can choose a program of higher education with a duration of four to six

years. There are three different degrees that are conferred by Russian universities: The first degree

is the Bakalavr (Bachelor) degree. Bakalvr's programmes last for at least 4 years of full-time

university-level study. The programmes are elaborated in accordance with the State Educational

Standards which regulate almost 80% of their content. The other 20% are elaborated by the

university itself. The programmes include professional and special courses in Science, the

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Humanities and Social-economic disciplines, professional training, completion of a research

paper/project and passing State final exams. The Bakalavr's degree is awarded in all fields except

Medicine after defending a Diploma project prepared under the guidance of a supervisor and

passing the final exams. In Medicine, the first stage lasts for six years.

Holders of the Bakalavr degree are admitted to enter the Specialist Diploma and Magistr's

(Master's) degree programmes. The Magistr's (Master's) degree is awarded after successful

completion of two years' full-time study. Students must carry out a year of research including

practice and prepare and defend a thesis which constitutes an original contribution and sit for final

examinations.

Bakalavr's and Magistr's degrees were introduced relatively recently; they did not exist during the

Soviet period. Even now they are not offered by many six-year institutions.

Post-graduate levels

After obtaining a Specialist's or Master's Degree, a student may enter a university or a scientific

institute to pursue postgraduate education. The first level of postgraduate education is aspirantura

() that usually results in the Kandidat nauk degree ( , Candidate of

Sciences). The seeker should pass three exams (in his/her special field, in a foreign language of

his/her choice, and in history and philosophy of science), publish at least three scientific articles in

peer-reviewed journals, write a dissertation and defend it. This degree is roughly equivalent to the

Ph.D. in the United States.

After graduation a student may continue postgraduate education. Few (2 to 4) years of study indoctorantura () with obtaining important scientific results, publishing them and

writing new thesis would result in theDoctor Naukdegree (, Doctor of Sciences), but

the typical way is working in a university or scientific institute with parallel preparation of a thesis.

The average time between obtaining KandidatandDoctordegrees is roughly 10 years, and most of

newDoctors are 40 and more years old. Only 1 in 4 Kandidats reaches this grade.

Kandidat Naukmay keep position of Assistant Professor (Docent) in universities and of Researcher

or Senior Researcher in a scientific institutes.Doctor Naukcan hold position of full Professor, Head

of Laboratory or equal and higher ones.

Granting of advanced degrees is overseen by the Higher Attestation Commission of the Ministry of

Education and Science.

Reform of the education system

The Russian education system was originally inherited from the Soviet Union without any

significant changes. In the Soviet Union, education of all levels was free for anybody who could

pass entrance exams; students were provided with small scholarships and free housing. This was

considered crucial because it provided access to higher education to all skilled students, as opposedto only those who could afford it. Free higher education is the main reason why more than 20% of

Russians age 3059 hold six-year degrees (this number is twice as high as that of the United States).

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http://en.wikipedia.org/wiki/Kandidat_naukhttp://en.wikipedia.org/wiki/Dissertationhttp://en.wikipedia.org/wiki/Ph.D.http://en.wikipedia.org/wiki/Higher_Attestation_Commissionhttp://en.wikipedia.org/wiki/Higher_Attestation_Commissionhttp://en.wikipedia.org/wiki/Ph.D.http://en.wikipedia.org/wiki/Dissertationhttp://en.wikipedia.org/wiki/Kandidat_nauk


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The downside of that system was that institutions had to be funded entirely from the federal and

regional budgets; therefore, after the collapse of the Soviet Union, expenses on education took a big

blow; institutions found themselves unable to provide adequate teachers' salaries, students'

scholarships, and to maintain their facilities. To address the issue, many state institutions started to

open commercial positions. The number of those positions has been growing steadily since then.

Many private higher education institutions have emerged, mostly in the fields where Soviet systemwas inadequate or was unable to provide enough specialists for post-Soviet realities, such as

economics, business/management, and law. In 2004, of all first-year students, 35% were paying for

their own education in state institutions and 20% were enrolled in private universities.

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Taxation

The structure of the Russian tax system provides revenues for three budgetary tiers: federal,

regional and local. All taxes are legislated at the federal level, although regional and local

governments have the power to set rates and establish procedures for those taxes that are

specifically designated as a regional or local. The following summarizes the major taxes currently

payable by business and individuals in Russia. This list is not all-inclusive and there are a number

of further federal, regional and local government fees on certain activities, including various stamp

duties and license and registration fees.

Federal Taxes Regional Taxes Local Taxes

Profit tax Advertising Tax Property Tax

Value-Added Tax (VAT) Land Tax Transport Tax

Excise taxes Gaming Tax

Personal income Tax

Unified Social Tax

Customs duties

Mineral resources Extraction Tax

Payments for the use of naturalresources

Generally, the lower-tier authorities cannot grant concessions with respect to taxes allocated to a

higher authority (i.e. regional authorities cannot grant concessions on federal taxes), even though a

certain portion of federal taxes is allocated to regional/local budgets. Starting from January 1 2002,

Profits Tax concessions cannot be granted by regional/local authorities. The only right the regional

authorities have is to reduce the regional Profit Tax rate by no more than four percentage points for

certain groups of taxpayers. As of 1 January 2004, the grand fathering clause with respect to the

regional concessions ceased to exist.

Tax Audits

The tax returns of Russian legal entities are audited by the tax authorities at the time they are

submitted. A tax officer reviews and verifies the tax calculations on the basis of the financial

statements submitted. The tax authorities do not issue tax assessments to enterprises. Instead, the

company must pay the amount of tax indicated in the tax return.

In addition, the tax authorities regularly perform field audits of companies, which involve a

thorough investigation of the records and documentation underlying the tax calculations. Such

audits may not last more than three months, and may cover only three calendar years prior the year

of audit. Once audited, the tax authorities may not audit the same period again (although someexception exist).

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Tax Rates

Corporate tax

Tax rate for resident companies Corporate income tax rate varies between 20%and 24%: 7.5% of it is paid to the federal

government, between 10.5% and 14.5% is paidto republican authorities and 2% to localauthorities.

Tax rate on long-term capital gains Capital gains are taxed with the same rate as thecorporate tax.

System governing groups of companies anddividends paid by subsidiaries to their parentcompanies

In Russia, a 15% withholding rate applies ifeither the recipient or the payer of the dividendsis a foreign legal entity.

Tax rate on branches Branches are imposed on the corporate tax at arate between 20% and 24%.

Income taxFiscal year The fiscal year begins on January 1st and ends

on December 31st of the same year.

Income tax rate Personal income tax rate is 13% but specialrates are applied to some kinds of income, e.g.

prizes, insurance proceeds, interest on certainbank deposits. Incomes of non-residents aretaxed at 30%.

VAT rates

Reduced rates The reduced rates From VAT in Russia varybetween 0% (some imported medicines andequipment) to 10% (some supplies of basicfoodstuffs and children's clothing).

Other important taxes

Tax on deals safety 0,8% of the amount of the deal

Land taxes 2%

Donations and successions Successions: 5% to 30%Donations: 3% to 40%

Import Tariffs

Significant changes in customs legislation were introduced by the new Russian Federation Customs

Code, which came into force on January 1 2004. The new Code has changed procedures for

carrying out customs clearance and exercising customs control. In addition, it establishes additional

guarantees for protecting the interests of parties to customs-related activities and establishes a

different procedure for payment and collection of customs payments.

The majority of customs duties in Russia are ad valorem and the tax basis for assessment of

imported goods to customs duties is the customs value of goods. There are also specific duties forcertain types of imported goods, which are based on the volume, weight or quantity of imported

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goods. Some duties have a combined rate incorporating the above two types of duty rates and,

therefore, the tax basis may vary.

The customs value is determined in line with GATT/WTO principles and is generally equivalent to

the DAF/Russian border transaction price of the goods concerned.

Classification of customs codes follows the international Harmonized System of Coding ad

Description of Commodities.

Base duty rates vary widely, from 100% on spirits to 0% for printed matter, some food products and

some other priority imports. However, the average range of duty rates varies from 5% to 20% of the

customs value of goods. Duties must be paid before or at the moment of submission of a Cargo

Customs Declaration. The base rates specified in the legislation apply to countries that have been

granted Most Favored Nation status. Some goods from developing and goods from least

developed countries may be imported at 75% of the base rates or zero rates, respectively. Goods

imported from other countries, or goods for which the country of origin cannot be determined, will

be subject to duty at double the base rates.The following are exempt from customs duties:

1. Goods, with the exception of excisable goods, imported into Russia as contributions to the

charter capital of enterprises with foreign investments (subject to certain conditions).

2. Means of transport that are being used to effect international deliveries of passengers and cargo.

3. Goods for the official or personal use of representations of foreign governments

4. Russian and foreign currency and securities.

5. Goods imported as humanitarian aid.

6. Goods placed under the customs procedure for transit.

7. Goods imported for performing work and services under Production Sharing Agreements.

8. Goods imported by individuals for their personal use in accordance with the regulations set out in

the Customs Code. Currently, individuals may bring in goods up to a value of from 2000 USD

(subject to certain conditions).

9. Cultural valuables imported by individuals.

The above list does not provide the full range of concessions granted by the law On Customs

Tariffs.Goods (equipment) may be imported by enterprises under the customs regime of temporary

importation, normally for period of up to two years, in which case periodic customs payments are

charged at 3% per month of the total amount of customs payments that would be payable had the

goods been imported for free circulation. Upon re-export of the goods, periodic customs paymentsmade are not refunded. If the period of temporary import exceeds six months, security for customs

payments should be provided (e.g. deposit, pledge, bank guarantee). Goods which qualify as fixed

assets may be temporarily imported for 34 months with periodic customs payments. Such goods are

recognized as released for free circulation when the amount of periodic customs payments reaches

the total amount of customs duties payable when the goods are imported for free circulations. No

interest is charged in this case.

Foreign individuals may temporarily import goods which are neither for production nor for other

commercial activity but for personal use, and are intended to be re-exported, without payment of

duties. There is a duty free temporary import limit of up to one with respect to cars.

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Business conditions

Labour Market

Provided below some descriptive statistics on developments in the Russian labour market,

highlight its most interesting characteristics for this kind of research.

Availability of skilled workforce

In the Russian Federation, as in other centrally planned economies of Central and Eastern

Europe, employment, at least until the late 1980s, was largely centralized. Labor force participation

was high for both sexes and the structure of employment was skewed toward unskilled and skilled

manual labor, as a result of primarily extensive economic growth and the priorities of Soviet central

planners which emphasized certain branches of the economy.

Figure 2.1

Able-bodied population by regions, Russia (thouth. ppl)

0

5000

10000

15000

20000

25000

1995 2000 2004 2005

Central Federal District Notrh-West Federal District

South Federal District Privolgski Federal District

Uralian Federal District Siberian Federal District

Far Eastern Federal District

Labour and Employment in Russia 2005 Federal State Statistics Service of Russia

To define the level of availability of skilled workforce in Russia in figure above is shown

10 years trend of changes in number of able-bodied population in different regions. It demonstrated

slow but stable growth in all the regions except Far Eastern Federal District.

Arrangement of total labour force by level of education displayed that the majority of workforce is

graduated (23.6) or has secondary education (23.2 and 26.3) that covers more than 70% of all work

force.

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Figure 2.2

Labour force by education levelRussia 2005

23,6

2

26,317,6

23,2

6,6 0,7

Graduate Undergraduate

Secondary vocational level Primary vocational level

Secondary school Basic school

Without education


This structure becoming more complex and understandable when exhibited with arranging

by industries. And it is possible to compare what kind of education employee needs to work in this

field.

Figure 2.3

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Industry

Agreeculture

Forestsector

Construction

Transport

Telecommunication

Wholesailng&Retailing

Housing&Utilitiesinfrustructure

Healthservice

Education

Art&Culture

Science

Finance

Managem

ent

Arrangment of Labour force due to

education&industries, Russia 2005Graduate Undergraduate Secondary vocational level Primary vocational level

Secondary school Without education Without education


Other important issue for understanding situation around workforce in Russia is university

graduation. Growth trend in graduation of engineers is shown on the figure bellow. The highest

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number of graduates is in machinery and metalwork and the lowest one is in metallurgical

engineering and Professional equipment.

Figure 2.4

University graduation in Russia

(thousand people) 2005

0

2

4

68

10

12

14

16

1995 2000 2001 2002 2003Power&Power-plant engineering Metallurgical engineering

Machinery&Metalwork Production machines&facilities

Electric engineering Professional equpment engineering

Computer engineering Radio-engineering&Telecommunication


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Wages, Labour cost and working hour

Persistent differences between labour market models evolving in Russia and other countries

of Central and Eastern Europe (CEE) are one of the most intriguing puzzles. These differencesbecame evident almost as soon as market reforms started in Russia and revealed a unique Russian

way of labour restructuring. At the start of systemic transition, both government experts and

independent analysts provided gloomy predictions of an explosive rise of unemployment to a level

comparable with that in the US during the Great Depression. However, these forecasts were wrong.

Instead, unlike the labour markets of most CEE countries, it exhibited a surprisingly high degree of

mobility and flexibility. Gradually, it became evident that the Russian labour market is conductive

to the proliferation of various non-standard behavioral patterns that either do not exist in other

economies or play a minor role. Such spontaneously developed adjustment mechanisms as

administrative leave, involuntary work on shortened hours, widespread multiple job-holding,

massive wage arrears, and shadow labour compensation proved to be a real surprise for those who

expected that the Russian labour market would respond in a standard way to the shocks of

systemic transition.

Picture of what is happening in Russian Labour market now is illustrated by figures below.

Figure 2.5

Arrangment of work force due to duration ofworking week in Russia

(thousand people)

0

10000

20000

30000

40000

50000

60000

70000

less than9

9-15 16-20 21-30 31-40 41-50 morethan 51

Normal duration of working week Real duration of working week


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For the interval from less then 9 to 30 working hours per week number of people in normal

duration of working week is completely the same with number of people in real duration. On

interval from 31-40 hours per week number of people in normal duration of working week is

noticeably lower then in real. But after it amounts up to 40 situation is conversely different

number of people in real duration is higher than in normal one.In the figure below the duration of average working week is shown. The longest working

week is in Uralian and Siberian Federal Districts (up to 38.7 hours per person) and the shortest one

in South Federal District (around 37.7 hours per person). The difference between highest and lowest

average working week is 1 hour per person.

Figure 2.6

38,5

38,1

37,7

38,4

38,738,6

38,1

37,2

37,4

37,6

37,8

38

38,2

38,4

38,6

38,8

CentralFederalDistrict

Notrh-WestFederalDistrict

SouthFederalDistrict

PrivolgskiFederalDistrict

UralianFederalDistrict

SiberianFederalDistrict

FarEasternFederalDistrict

Average working week

Russia (hours per person)


Labour costs levels are one of major considerations in investment decisions, especially in

the manufacturing sector. Competitive levels of labour costs are one of key advantages of central

and eastern Europe in attracting potential investors from high labour cost markets such as Western

Europe, North America or Japan. However, the region in itself is comprised of countries with

earnings and labour cost levels that vary by a factor of 1020 times and it is essential to any

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potential investor to be aware of those differences. In the figure below Forecast of increases of Euro

earnings 2006-2010 vs. actual increases 2001-2005, percent in constant prices

Figure 2.7

Forecast of increasing of Euro earning

(%)

Source: Labour Costs Central and Eastern Europe - edition 2006

Table 2.1 Actual increases of Euro earnings

Actual increases of Euro earnings 2001-2005 vs. forecast for 2006-2010

Actual 2001-2005 Forecast 2006-2010Yearly

av.Yearly

av.TotalTotal

Bulgaria 45.728.2 5.1 7.8Czech Rep. 49.551.5 8.7 8.4Estonia 45.247.0 8.0 7.7Hungary 29.370.1 11.2 5.3

Latvia 62.117.3 3.2 10.1Lithuania 58.427.4 5.0 9.6Poland 41.810.6 2.0 7.2Romania 41.269.0 11.1 7.1Russia 86.9156.8 20.8 13.3Slovakia 48.650.0 8.4 8.3Slovenia 23.911.1 2.1 4.4Ukraine 82.8144.2 19.6 12.8

Source: Labour Costs Central and Eastern Europe -edition 2006

Structure of Labour costs in Russia is fallowing: the major part is 71.6 % - wages then 24.3

% social security costs and the rest 4.1% are shared between welfare costs (0.5), taxes and duties

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(0.4), costs of housing provision (1%), education costs (2%) and others. Structure of Labour costs

by industry is shown in table below. The main shares of costs in different sectors is similar to

general costs structure, but has some differences. The highest share of wages is in Non-ferrous

metal industry. Highest social security costs and taxes is in Iron and steel Industry and in

Machinery and metalwork.Figure 2.7

Labour cosots structure in Russia 2005

0,31

0,4

2

71,60,5

24,3

Wages Costs of housing provisin

Social security costs Education costs

Welfare costs Others

Taxes and dues

Labour and Employment in Russia 2005 Federal State Statistics Service of RussiaTable 2.2 Structure of Labour costs in Russia (%)

Industry WagesCosts ofhousing provisin

Social securitycosts

Educationcosts

Welfarecosts Others

Taxesand dues

Iron and steelIndustry 68,8 0,4 27 0,3 2,1 1,3 0,1

Non-ferrous metalindustry 71,1 0,9 23 0,3 1,8 1,3 0,7

Machinery andmetalwork 69,4 0,5 25,1 0,2 1,8 2,2 0,8

Telecommunocation 71,1 0,2 24,9 0,4 1,1 1,7 0,6


The continuing economic reforms in Russia are expected to significantly alter the wage and

employment structures. Statutory minimum wages are yet another indicator of a countrys

compensation levels, and help in assessing expectations of employees who carry out elementary

tasks which do not require qualifications. Below are minimum monthly wages rates for year 2005.

(as of January 1st.)

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Table 2.3 Statutory minimum monthly wagesst

Statutory minimum monthly wages, CEE countries on January 1 2005Country Local currency Euro US dollar

Bulgaria 150 77 95Czech Republic 7 185 226 280Estonia 2 690 172 217Hungary 57 000 226 281Latvia 80 119 148

Lithuania 500 145 180Poland 849 187 232Romania 3 108 000 77 95Russia 720 20 25

Slovakia 6 500 162 202Slovenia 117 500 492 611Ukraine 262 40 49

Exchange rates are yearly averages for 2004 Source: CE Research

The ratio of minimum to average wages in the economy for all countries except Russia is in

a range of 30-40%. In Russia minimum wages are below 10% of the average, which reflects a

different understanding of the role of minimum wages in the economy.

Table 2.4 Statutory minimum monthly wages 2000-2004 in Euro

st)Statutory minimum monthly wages 2000-2004 in Euro, CEE countries (as of January 1

2000 2001 2002 2003 2004

Bulgaria 43 51 56 56 61Czech Rep. 112 167 185 195 210

Estonia 89 102 118 138 159Hungary 98 156 206 197 211Latvia 89 107 103 109 119Lithuania 116 120 124 125 130Poland 175 207 197 182 182Romania 35 56 47 47 62

Russia 5 17 15 13 17Slovakia 94 114 130 147 152Slovenia 288 424 449 443 467Ukraine 23 25 28 27 31

Exchange rates: yearly averages Source: CE Research

In 1999 minimum wages were at a level of 8090 Euro in Hungary, Estonia, Slovakia and

the Czech Republic. Five years later they were at over E210 in Hungary and the Czech Republic

and at above E150 in Estonia and Slovakia. Minimum wages almost stagnated during this period

only in Poland.

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Table 2.5 Statutory minimum monthly wages 2000-2004 in US dollars

stStatutory minimum monthly wages 2000-2004 in US dollars, CEE countries (as of January 1 )

2000 2001 2002 2003 2004

Bulgaria 40 46 53 63 76Czech Rep. 104 150 174 220 261Estonia 90 95 105 145 200Hungary 90 140 194 223 262Latvia 83 96 97 123 148Lithuania 108 108 117 141 162Poland 161 186 186 206 226Romania 32 50 44 53 77Russia 5 15 14 15 21Slovakia 87 102 123 165 188Slovenia 266 380 423 500 579Ukraine 22 22 26 31 39

Exchange rates: yearly averages Source: CE ResearchSource: Labour Costs in Central and Eastern Europe - edition 2005

Another no less specific adjustment option could be viewed as shadow compensation.

This does not refer to non-registered income from small businesses or illegal activities, a

phenomenon well known to many economies in the world. Russias specifics consist in the fact that

large and medium-size enterprises in the legal sector account for the major part of shadow

compensation. They either disguised wages under other forms of remuneration (interest on bank

deposits, insurance payments etc.3), or paid them in cash on the basis of informal agreements with

employees. Whereas in 1993, shadow wages amounted to 20% of the shown wages, in 1996-

1998, this proportion had increased to 45-46%. Therefore, one-third of total compensation was

carried out in shadow.

Figure 2.8

116,40

172,60

193,02211,89

245,72

0

50

100

150

200

250

2000 2001 2002 2003 2004

Average nominal wages in Russia

(EUR)


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Table 2.6 Average wages by region 2005, Russia

Accrued Wages (per cent to 2003)Average nominal wage

Regions EUR nominal real

Central Federal

District 206,80 123,9 111,8Notrh-West FederalDistrict 213,67 122,4 109,7

South FederalDistrict 132,11 125,7 113,4

Privolgski FederalDistrict 146,36 121,6 108,8

Uralian FederalDistrict 275,46 119,9 109,6

Siberian FederalDistrict 184,95 122,2 110,7

Far Eastern Federal

District 259,06 120,7 108,3

In the course of the transition decade, the Russian labour market has sustained a series of

deep financial shocks that have created an unfavorable economic climate for workers, for employers

and for the State. Old and new structures co-exist in ways that are elusive to register, evaluate and

control. The gaps in official statistics, coupled with the arrears in the public purse, make analysis of

the labour market shifts that have taken place in the reform years difficult to measure in the strict

terms of positive or negative. Economic liberalization led to positive shifts in the structure of

employment, the expansion of the non-state sector, the emergence of new spheres of economic

activity, and the progress of private enterprise, all of which contributed to the development of free

competition on the labour market.

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Productivity

Movements across sectors influence not only the compositionand so to some extent the

geographical reallocation of Russia's work force but also the productivity of labour, which in turn

determines growth. Measured labour productivity in the Russian Federation has increased since the1998 crisis, but obviously there are differences across sectors. Aggregate GDP and employment

both started to recover quickly after the 1998 crisis, with GDP growing faster than employment.

But, in fact, labour productivity, just like other real variables, was not affected very much by the

crisis. Declining with the "transformational recession" in the early 1990s, it bottomed out around

1996

Different sectors develop at different speeds, but as a rough guide it is appropriate to group

the changes in labour productivity over the course of transition for the economy as a whole into two

sub periods one of decline (1990_1996) and one of growth (1996_2002). Aggregate labour

productivity fell by 27 percent over the first period, and it increased by 19 percent over the second.

These are startling numbers and the dramatic turnaround was not confined to the aggregate level.

Taking the division into main economic sectors, as a starting point, we find that industry moved

from a cumulative decline in productivity of 17 percent during 1990-96 to accumulative increase of

38 percent in 1996_2002; agriculture went from minus 32 per cent to plus 48 percent; market

services improved from minus 27 percent to plus 11 percent; and even non market services tagged

along, proceeding from a cumulative decline of almost 17 percent to an increase of almost 3

percent.

Figure 2.8Gross value added in non-agricultural sector, in constant prices Russia

(bill. rub, 2000)


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Gross value added in non-agricultural sector in constant prices decreased in period from

1989 to 1998 for 43%, and then it increased on 27% from 1990 to 2002. Gross value added in

service sector went down on 20% from 1990 to 1998 and in period from 1990-2002 it increased on

19%.

Rates of additions of production rate per hour in industry went down gradually duringsecond part of 70th and first part 80th (from 4.8% to 1.9% per year). In second part of 80th rates of

additions of production rate grew to 3.3% per year and growth of production rate was faster than

growth of output. In the early 90th labour productivity fined down on 23%. But in 1995 labour

productivity turned to growth. And from 1995 to 2002 it increased on 41%.

Figure 2.9 Hourly Labour productivity in Russia (rub/ person-hour, 2000 year)


Alternatively, an extra tax revenue to a considerable extent, the impressive productivity

growth in industry since the crisis has been driven by increasing capacity utilization. As this

possibility subsides, investment is the only variable that can drive further productivity increases.

Diminishing employment in industry cannot detract from the need to provide a climate conducive tonew firm growth in this sector. Along with the tax policies just discussed, this reaffirms the

importance of policies designed to create a beneficial investment climate overall.

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Infrastructure

Infrastructure is generally a set of interconnected structural elements that provide the

framework supporting an entire structure. The term has diverse meanings in different fields, but is

perhaps most widely understood to refer to roads, airports, and utilities. In other applications,

infrastructure may refer to information technology, informal and formal channels of

communication, software development tools, political and social networks, beliefs held by members

of particular groups. Still underlying these more general uses is the concept that infrastructure

provides organizing structure and support for the system or organization it serves, whether it is a

city, a nation, or a corporation. Economically infrastructure could be seen to be the structural

elements of an economy which allow for production of goods and services without themselves

being part of the production process. e.g. roads allows the transport of raw materials and finished

products.

Fig. 2.1 Countries by electricity consumption

Energy consumption broadly tracks with gross national product, although there is a

significant difference between the consumption levels of the United States with 11.4 kW per person

and Japan and Germany with 6 kW per person. Canada has the highest energy consumption perperson, whereas the lowest energy consumption takes place in the third world. In developing

countries such as India the per person energy use is closer to 0.5 kW.

35
http://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Social_networkhttp://en.wikipedia.org/wiki/Cityhttp://en.wikipedia.org/wiki/Nationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Gross_National_Product#Gross_National_Producthttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Gross_National_Product#Gross_National_Producthttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Nationhttp://en.wikipedia.org/wiki/Cityhttp://en.wikipedia.org/wiki/Social_networkhttp://en.wikipedia.org/wiki/Information_technology


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Figure 2.10

0

5000

10000

15000

20000

2000 2001 2002 2003 2004

Electric power consumption (W per capita)

Finland Russian Federation Ukraine


Finland has high rate of energy consumption and as you can see on the figure above it has a

tendency to grow. In the period from 2000 to 2004 consumption of electric power in Finland

increased for 9.77%, in Russia for 8.32%, in Ukraine 13.64%.

Figure 2.11

0

2000

4000

6000

8000

2000 2001 2002 2003 2004

Energy use (kg of oil equivalent per capita)



Energy use in comparing countries showed growth within the range 6.38 14.3 from 2000

to 2004, with the highest growth in Finland and the lowest in Russia. Difference in consumption of

energy between Finland and Russia was around 63% (2826,02 kg of oil equivalent per capita) in

2004 and between Russia and Ukraine - 51% or1501,69 kg of oil equivalent per capita.

As it was mentioned above one of the components of infrastructure is IT. In figures bellow

you can see IT characteristics of comparing countries.

Difference in number of fixed line and mobile phone subscribers per 1000 people between

Finland and Russia was huge in 2000 (around 426 %). But during fallowing 5 years Russia

demonstrated rapid growth in 363% in this area of infrastructure. And in 2005 difference in number

of fixed line and mobile phone subscribers per 1000 people between Finland and Russia was only

25% (17 times less that in 2000).

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Figure 2.12

0

500

1000

1500

2000 2001 2002 2003 2004 2005

Fixed line and mobile phone subscribers

(per 1,000 people)



Internet is becoming an essential part of our ordinary life and business environment.

Number of Internet users is increasing rapidly during last years. If in 2000 it was only 19,82 users

per 1000 people in Russia, than in 2005 it was 152,33 per 1000 people which 6 times more. In

Ukraine tendency is the same. In 2005 it was 12 times more than in 2000.

Figure 2.13

Internet users (per 1,000 people)

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005



In the figure bellow the difference in number of Internet users between Finland, Russia and

Ukraine is shown.

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Figure 2.14

Difference in number of Internet users

(times)

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005

Finland Russian Federation Finland/ Ukraine


Commonly under the term infrastructure one understands roads, airports, and utilities.

Motor roads are one of the key factors in influence of countries economy. Historically

restoration of economical strength and social sphere of developed countries had its beginning from

developing of motor roads. If country has well-organized net of motor roads it will give an

opportunity to economy and to all sections of population to develop on a ratable basis.

Russia has 47 thousand. km of motor roads managing by Federation, 550 thousand. km by

regions and 300 thousand. km by municipalities. Around 6.5 mill tons of goods are transported

through motor roads (in comparison with railways transporting 1.3 mill with 7-10 times less costs).

With the growth of level of motorization in 79% increase in motor roads mileage was only

in 15%. And budgetary financing drop down for 12%.According to world statistic data, frequency ratio of using air carriers directly correlates with

economic level of the country. Volume of air transportation in Russia has begun growing again after

stagnation had been coursed by considerable appreciation of fuel in previous year. Passenger traffic

in first half of 2006 has increased on 9.2% in comparison with the same period in 2005 and reached

14.77 bill. passengers. However international passenger traffic increases on 9.9% (6.6 mill

passengers) and internal passenger traffic grew on 8.8% (8.1 mill passengers). Previous year growth

was 1.5% reached by reason of increase in international passenger traffic for 4.1% and decrease in

internal traffic for 0.5%.

Russia has longest electrified railways in the world more than 44 thousand. km (total

mileage of railways is 85 thousand. km). The second and the third longest electrified railways are

in China and Germany, more than 24 thousand. and 21 thousand. km pro tanto.

Number of passengers travelled with Russian railways in 2006 was 1 bill. 352 mill 800

thousand (2.5% more than in 2005). Volume of goods transported by Russian railways in 2006 was

1 bill. 311 mill 312 thousand. tons (3% more than in 2005 and 0.7% more than is was planned).

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Research and Development

For Russia the beginning of XXI century is characterized by prevalent development of the

resource sector of economy, providing to a great extent funding of the federal budget. And it occurs

against essential degradation of the high technology industry that is precisely enough characterized

by Russias share of the hi-tech market (according to different estimates it amounts to 0.1-0.5%).Meanwhile, the experience of the developed countries eloquently proves advantages of

another model of economic development the innovative one, within which economic growth is

achieved due to the technology factor providing up to 2/3s of the growth of the GDP. Such model of

development allows the countries of the West to establish their competitive positions in the world

markets of high-tech products, bringing huge annual incomes, to solve successfully social and

economic problems.

Today it is vital precisely to define on the national level, in what direction the national

economy will develop further and to generate the mechanisms providing interaction and balanced

development of resource, industrial and technological sectors of economy. Only having defined the

precise strategic line of economic development of the country, we can size up what science we

need, to formulate the appropriate technological policy and to carry out competent reforms in

scientific sphere.

The course for innovative economy requires, first of all, the further development of basic

research the role of which in modern conditions increases. Fundamental achievements in the field of

scientific knowledge create a basis for applied research in the industry for 10-20 years ahead. At

this stage of innovation cycle the required innovative intellectual resources are accumulated, the

banking capital is formed, new problems of economic development are defined. According to the

estimates by some American experts, in the USA $1 invested at R&D stage returns $9 of GDP.

Having defined overall the national economic strategy, we have to very clearly definescientific and technological development priorities. Their choice should be based on deep

forecasting and system researches of prospects for development of world science, using the so

called "technology foresights", widespread in world practice, taking into account the available

scientific developments and analysis of markets, on which the newly-made products can be sold.

Today high technologies are called upon to become not only a determinative for gaining

new "niches" in the world markets, but also the generator of achieving the most urgent promising

purposes that have key significance for the future of Russia (increasing effectiveness of key

branches of economy and living standards, maintenance of the countrys defence, improvement of

ecological situation). Considering the accumulated potential of the Russian science and the needs of

both domestic, and global markets, in development and implementation of measures of the

governmental support of science and technology it is expedient to concentrate efforts on a range of

main lines of research and development.

They include, first of all, information technologies and electronics. High quality and

ingenuity of developments, low capital intensity and, consequently, the most real prospects of

entering the world markets have neuroinformation science, pattern recognition and image analysis

as well as mathematical modelling and methods of computing experiment. These technologies form

a basis for creation of applied systems of computer modelling for nuclear power engineering,

ecology, economy, social sphere; applied intelligence software, allowing to recognise and assess

items using badly structured, not formalized and fuzzy initial data (the potential offshore marketmakes up tens of thousands of systems per year). Development of Russian computer systems with

ten and hundred billion operations per second output is of paramount significance. Such systems are

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necessary for to solve the challenges in the field of nuclear power, aerodynamics, meteorology, etc.

Another problem of national importance is development of integrated information and

telecommunication systems with use of domestic technologies and hardware.

Figure 2.15

0 %

20 %

40 %

60 %

80 %

100 %

Finland Russian

Federation

Ukraine

GERD by sector of performance (%, 2006)

Higher education

Government

Business enterprise

Source: OECD

The central question of evolution of science in conditions of the innovative model of the

Russian economy is the question of its financial provision. It is necessary to point out that in

conditions of degradation of technological pattern of production for that has occurred in years after

disintegration of the USSR reduction of expenses on research and development has become a stable

trend. It is appropriate to remind that in the last 10-15 years real financing of science and

technology has been cut down 15-20 times as compared with 1991 and it has dropped considerably

below the critical (2.0% of GDP) threshold of stable development and the level of technologicalsafety. No other branch in Russia has been subject to such strong destruction.

Figure 2.16

0 %

20 %

40 %

60 %

80 %

100 %

Fin Ru Ukr

GERD by source of funds (%, 2006)

Business enterprise Government

Higher education Private non-profit Institutions

Abroad Not distributed

Source: OECD

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Figure 2.17

0

1 000 000

2 000 000

3 000 000

4 000 0005 000 000

6 000 000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total gross domestic expenditure on R&D (GERD)

Finland, local currency

Total gross domestic expenditure on R&D (GERD) / Dpense intrieure brute totalede R&D (DIRD)

Figure 2.18

0

50 000 000

100 000 000

150 000 000

200 000 000

1996 1997 1998 1999 2000 2001 2002 2003 2004


Russian Federation, local currency


Figure 2.19

0

1 000 000

2 000 000

3 000 000

1997 1998 1999 2000 2001 2002


Ukraine, local currency


Source: OECD

In 2003 internal costs on research and development in Russia amounted to 1.28% of GDP,while in the countries with the developed economy the standard figure describing the share of

science cost in GDP, varies within the limits of 2.5-3% (dada for Finland and Ukraine are in the

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figures bellow). Russia spends on science 5 times less than Germany, and 25 times less than the

USA. Now the share of research and development costs in Russia matches the level of 1946-1950s,

and the absolute value of total science cost matches the level of early 60s.

Figure 2.20

Total GDP expenditure on R&D

(as persantage of GDP)

0,00 %0,50 %1,00 %1,50 %2,00 %2,50 %3,00 %3,50 %4,00 %

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

Finland

Russian Federation

Ukraine

Source: OECD

Reduction of the state expenses on research and development has become a stable trend. For

the last decade the share of science costs in the countrys budget has been steadily dropping.

Contrary to the adopted law on science, according to which this figure should make not less than

4%, the share of science in the budget in the last years has varied at the level of 1.6-1.8%. In 2004

this value was 1.7%, in 2005 costs on all science fundamental, high school and industrial made

56 billion roubles, or 1.92% of the budgets supply. It is necessary to point out that in economically

developed countries the level of budget financing makes 4-5%. If the amount of science fundingwill grow in the Russian Federation at the same rate, it will reach the present level of financing the

science in the USA only in 149 years (about $200 billion).

To feel sharpness of the situation, it is enough to present the current science budget of the

Russian Federation in the dollar equivalent. Not counting sciences of the defence complex, this

budget does not exceed $2 billion, and is quite comparable to annual budgets of some not the largest

American universities and national laboratories the budget of which exceeds $2 billion. In

particular, the US National Academy of Sciences and the adjoining it the engineering academy and

the institute of the health that are scientific communities in which there are no institutes, have the

budget of more than $3 billion, while the budget of the Russian Academy of Science with its almost

400 institutes is $0.5 billion.

In the conditions when no stimuli for investment in scientific research and development by

the private capital have been created in the country, budget financing still remains the basic source

of funds of this sphere. The budgetary funds are predominating in the structure of internal science

cost, moreover the share of budget financing for the last five years not has dropped, but on the

contrary, it grew from 49.9% in 1999 to 58.4% in 2003.

And today it is difficult to agree in full with the assertion that insufficient financing of

science is defined by extreme lack of funds. In our opinion, its level is defined by wrong budget

priorities. It is enough to compare budgets, for example, in the USA and Russia. So, the volume of

GDP in Russia is approximately 10 times less than in the USA, while the budget spending onscience is 25 times less than in the USA.

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Nobody yet managed to create a serious science and the advanced engineering without the

state support and substantial budget expenses. These expenses will bring multiple gains in future

and, in the end, define success of social and economic reforms conducted by us. And on the

contrary, constant under financing of science transforms it into a wasteful sphere that practically

eliminates possibility to use science as the primary factor of economic growth, as analytical

estimates show that economic effect occurs at reaching the critical level of hi-tech share of GDPwhich makes not less than 1.5-2.0%.

The further destiny of the Russian science depends on precisely verified and effective

strategy of scientific and technical development and, undoubtedly, requires a powerful financial

dope, approximately in the amount of 2-2.5% of GDP annually. And it is a question not only of

increase in state financing of research and development, but also of creating effective economic

mechanisms and the stimuli aimed at attracting private investment in the sphere of science.

Russia has accumulated unique experience on integration of the academic and university

potentials for training of scientific personnel and specialists for various branches of economy. This

experience is expressed in variety of forms and the directions of cooperation allowing to use the

strength of partners as much as possible. As it follows from the analysis, the most effective form,which has been proved in practice, is associative cooperation of equal partners, maintaining their

organizational and legal independence (of a legal entity) and departmental subordination. Only then

interaction produces the multiplier effect.

As for the general problem of integration of science and education, here it is necessary to be

very careful with regard to Russias own experience in use of all the variety of forms and methods

of cooperation of universities and the academic science. The most important point here is the

initiative and interests of direct participants of partnerships. Formalism, bureaucratic imposing of

any opinions and schemes are rather dangerous in this business. The main principle is not formal

"inventing", but really existing conditions and interests which if integration would be implemented

will allow to increase quality of specialist training and to satisfy the need of science and economy in

competent personnel.

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Development of technology industries

Russia is one of the most industrialized of the former Soviet republics. However, years of

very low investment have left much of Russian industry antiquated and highly inefficient. Besidesits resource-based industries, it has developed large manufacturing capacities, notably in machinery.

Russia inherited most of the defence industrial base of the Soviet Union, so armaments are the

single-largest manufactured goods export category for Russia. Efforts have been made with varying

success over the past few years to convert defence industries to civilian use, and the Russian

Government is engaged in an ongoing process to privatize the remaining 9,222 state-owned

enterprises, 33% of which are in the industrial manufacturing sector.

Russian industries gave employment to nearly 66407 thousand people in 2004. In the table below

annual average of employees is shown.Table 3.1. Annual average of employees, Russia

1990 1995 2000 2001 2002 2003 2004

Thousandand people

In total 75325 66409 64327 64710 65359 65666 66407Technology industries (excepttransport equipment) 22809 17161 14543 14692 14534 14345 14301

The total number of employees in the technology industries has dropped off by 8508 thousand

people since 1990. If in 1990 30.3% of total employees have been working in industry then in 2004

it was only 21.5 %.

Table 3.2. Annual average of employees, Russia

1990 1995 2000 2001 2002 2003 2004

%

In total 100 100 100 100 100 100 100Technology industries (excepttransport equipment) 30,3 25,8 22,6 22,7 22,2 21,9 21,5

Below annual average employees due to rank in industry is shown.

Table 3.3. Annual average of employees due to rank in industry, Russia

1995 2000 2001 2002 2003 2004 Thousandand people

Industry 16006 13294 13282 12886 12384 11977

13000 10440 10344 9947 9485 9093production workersnon-manual workers 3006 2854 2938 2939 2899 2884Iron-and-steel industry 727 711 727 695 664 666

608 585 594 564 535 536production workersnon-manual workers 119 126 133 131 129 130

Nonferrous-metalsindustry 549 560 582 570 553 525

454 451 469 456 438 414production workersnon-manual workers 95 109 113 114 115 111

Mechanical equipment,electronics and electrotechnics

(exclude transport

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