Economy of the White Sea watershed area 5 page

Foreign investments have played a modest role in the region s economy during the 1990s because of their relatively small total amount, including the portion in the form of direct foreign investment (DFI). Despite the notable growth of DFI in 1999, their share in the total volume of capital investments in the region accounted for some 4.2%.

The industries constituting the specialty of the region (i.e., mining, metallurgy, chemistry, fishery, and marine transport) are traditionally characterized by a high- export potential. The latter is being used more fully since the early 1990s (Figure 7.15). The export of goods peaked in 1997, when it amounted to US$ 1,330 billion and exceeded the 1992 level by 3.5 times. A decrease in export volumes in 1998 and 1999 was provoked by a drop in the world market prices for major exported goods (chiefly, non-ferrous metals). In spite of that, the revenues expressed in rubles increased due to the ruble devaluation which followed the financial crisis in late August, 1998. As a result, the share of export revenues in the total volume of

1400

1992 1993 1994 1995 1996 1997 1998 1999

Figure 7.15. Foreign trade turnover (US$ million).

From http://www.hkki.fi/-vbi/murnam_ru.pdf [in Russian].

industrial production increased from 46% in 1997 to about 55% in 1999. The import volumes proved to be much lower than the export ones. This caused a strong positive trade balance throughout the 1990s. The region s foreign trade turnover (the sum of export and import) accounted for about 1% of the total for Russia.

Annual volumes of export of international services have amounted to about US$ 100 million since the mid-1990s. More than 80% of this volume has traditionally been constituted by sea transport services. Interestingly, revenues from international tourism services have been growing steadily: from US$ 0.3 million in 1996 to US$ 2.2 million in 1999. However, the relative amount of revenues (2% of all international services) is still rather low (http://www.hkki.fi/-vbi/murnam_ru.pdf [in Russian]; The Murmansk Oblast .. ., 2001).

The Kola Peninsula is noted for a globally unique diversity and richness of mineral resources. Many of them have commercial significance and are currently exploited, namely deposits of iron ore and non-ferrous metals such as nickel, copper, manganese and zinc, as well as rare metals. Other important minerals are phosphate and mica. In addition to mineral non-renewable resources, of high importance for the region are biological resources, especially fish. Long-term prospects of the region s development are connected with oil and gas extraction from large offshore deposits. They are located in the Barents Sea (the Shtockmanovskoye deposit and others), but are essential for the further economic development of the Murmansk Oblast. In the future, oil and gas pipelines running across the White Sea region may be laid down on the White Sea bed.

The Murmansk Oblast is the country s main source of raw materials for the production of phosphorous fertilizers. The oblast is the second in the country in terms of the assured deposits of copper-nickel ores (yielding only to the Norilsk region). The deposits are mainly polymetallic with some precious metals. The ores are processed at two large plants (the Pechenganickel and Severonickel industrial complexes), which are parts of the Norilskiy Nickel holding. From 1964 until recently, the plants had partly been using the Norilsk ore, which is rich but highly sulphurous. This fact accelerated the destruction of the ecosystems neighboring the plants. As a result, the vegetation around the cities of Monchegorsk and Nickel, where nickel is smelted, has been destroyed completely. Thus, numerous environ- mental problems mainly caused by the impact of metallurgical enterprises have emerged in the region over the past few decades. During the 1990s, due to produc- tion decline and refusal to use the Norilsk ore, harmful atmospheric emissions from industrial enterprises have notably decreased.

Capital investment aimed at environmental protection and sustainable use of natural resources in the oblast have been traditionally low. During the last decade, their real volume (i.e., accounting for the inflation rate) has fallen by almost six times, and its share of total capital investment has reduced by a factor of two. The important natural wealth of the oblast, whose value keeps growing, consists in relatively vast unpopulated and nearly pristine areas that occupy about one-half of the peninsula s territory. Of value is the diversity of northern flora and fauna, comprising hundreds of species, including those that are rare and endangered. There are three distinct biological zones within a short distance: taiga, forest tundra, and

tundra proper. There are over 130,000 rivers and lakes in the region. Landscapes are a combination of mountains and flatlands. Therefore, the preservation of biological diversity and wilderness in the region is one of the most pressing needs (Murmansk Oblast .. ., 2001).

The economic crisis that accompanied the reforms of the 1990s caused a dramatic deterioration of living standards both throughout the country and in the Murmansk Oblast. The liberalization of prices that was lunched in 1992 provoked the deepest fall in real life disposable income. In the following years the downward tendency persisted. In 1999, the real life disposable income in the Murmansk Oblast constituted 43.7% of the counter level in 1991. In 2000, a notable growth in the real income of the population was registered. However, its level was still two-fold lower than 1991. The increase in individual incomes after 2000 caused some improvement in the consumption structure. Namely, the shares of non-food and service consump- tion have grown at the expense of foods. However, despite the positive shift in the mean individual income in the Murmansk Oblast, the high number of people living below the official poverty threshold (defined as the subsistence minimum) remains a burning problem. In addition, there is a more than 10-fold difference between the highest and lowest income deciles (10% groups) of the population (Murmansk Oblast

.. ., 2001).

Despite the aforementioned massive outflow of population, the unemployment rate in the Murmansk Oblast was higher than the Russian average over the previous decade. One reason for this is the specificity of the regional economy, namely prevailing large, strictly specialized industrial enterprises and undeveloped small businesses. Development of alternative industries or small business of various kinds is hampered by higher production costs in comparison with southern regions of the country. It is difficult for the dismissed personnel of liquidated enter- prises to find new jobs. The recovery of the industrial output during the last two years attenuates the unemployment problem somewhat (the unemployment rate has fallen from 21.3% in 1998 to 12% in 2002). However, the rate is still 1.5 times higher on average than in Russia (Figure 7.16).

Intensive socio-economic and political transformations have rendered the last decade one of the most dramatic periods in the history of the region. Evaluation of the changes occurring should not be one-sided. On the one hand, certain positive achievements are evident. Economically, these are new freedoms for producers and a gradual establishment of private ownership that liberates entrepreneurial activities and fills regional markets with consumer goods (Figure 7.17). Politically, these are the establishment of democratic principles and the building of a civil society, and the establishment of local self-government and growing power of the regional govern- ment in defending the interests of people at the federal level. On the other hand, a number of negative processes accompanied the reforms. First of all was the deteri- oration of living standards for the majority of the population and the emergence of the social stratum - the new poor - consisting of people working in education, health care, and cultural spheres. Growing unemployment, declining life expectancy, decreasing birth rate, and increasing death rate are other negative consequences of the transformations.

25

15 Murmansk

Oblast

10 Russia

1990 1995 2000 2005

Figure 7.16. Unemployment rate (%) for the economically active population.

Mixed with foreign participation

Mixed (Russian without foreign participation)

Private

Minicipal

state

0 10 20 30 40 50 60 70 80 90

Figure 7.17. Changes in the ownership structure in industry (in %).

From http://www.hkki.fi/-vbi/murmam_ru.pdf [in Russian]

Improvement of the economic situation in 1999 and especially in 2000 created a basis for optimistic expectations regarding the future prospects of regional develop- ment. A more active policy of regional government in the last few years has encour- aged positive tendencies. The regional economic policy includes a set of measures aimed at strengthening the economic status of the oblast. The measures include the provision of legal and institutional support to the establishment of local zones of economic growth, a program of support to be provided to small businesses, working out the concept of socio-economic development for the oblast, etc.

Among the negative processes, which hinder future development, one could emphasize, first, a continuing depletion of mineral deposits and the related increase in extraction costs, which undermines the competitiveness of the main industries of the oblast, and, second, piling up of the industrial pollution levels in the areas containing numerous mining enterprises. These problems can partly be solved by introducing some advanced technologies of deep and environment-

friendly processing of raw materials, utilization of industrial waste products, and diversification of the local economy.

7.4.3 Republic of Karelia

During the 1990s, the Karelian GRP declined steadily in both its real value and in per capita terms. The rate of this decline was very significant. For instance, the 1998 Karelian per capita GRP only constituted 45% of its level in 1990. In comparison with Russia as a whole, the Karelian per capita GRP prior to 1994 had been on par with the national average, but by 1998 it declined to a level of just three-quarters of the Russian average (Karelia in 1991 1998 .. ., 1999; http://www.hkki.fi/-vbi/kare- lia_ru.pdf [in Russian]; Republic of Karelia in Egures .. ., 2003).

The Karelian GRP grew by 13% in 1999 and reached US$ 650 million. In the republic, this is considered to be the result of both the rapid devaluation of the ruble in the autumn of 1998 and a new economic strategy of the Government of Karelia. During the 1990s, the share of industry in the Karelian GRP fluctuated widely, which was a reflection of the rapid pace of economic restructuring in the region. Major sectors of the Karelian economy have been developing successfully since 1999. Transport is the second most important sector in the Karelian economy. This fact reflects the role of Karelia as a transport hub linking, on the one hand, the resource-rich Murmansk Oblast with European Russia and, on the other hand, north-eastern timber-exporting Russian regions and their Western European customers. The transport contribution to the republic s GRP also fluctuated throughout the 1990s (Karelia in 1991 1998 .. ., 1999; http://www.hkki.fi/-vbi/kare-

lia_ru.pdf [in Russian]; Republic of Karelia in Egures .. ., 2003).

Non-market services (such as public administration, public education, and healthcare, etc.) have been the third largest contributor to the Karelian GRP playing an increasingly important role in the economy of the republic. Likewise, the share of market services has grown, while that of trade and catering has gradually declined.

During the 1990s, the performance of the Karelian industry was somewhat better than in Russia as a whole, owing, first, to introduced tax concessions and, second, to faster industrial growth in 1999. Nonetheless, over the 1990-1998 period, the Karelian industrial output declined by more than 50%. Forest cuttings, the backbone of the Karelian industry, declined by 36.7% over the 1990-1998 period. The structure of Karelian industry is dominated by the timber and pulp-and- paper. Together they produce more than one-half of the total industrial output. The third largest industry is ferrous metallurgy. In 2002 its share of the total output was 17.8%. During the 1990s, these three industries have been strengthening their dominance. Their joint share increased from 40.2% in 1990 to 65.7% in 1999. The share of the power supply industry also increased from 2.8% in 1990 to 12.5% in 1995, but in 1999 it declined to 7.5% only to restart its growth again in 2002 to 14.1% due to tariff fluctuations. Shares of all other industries declined substantially. The above pattern of economic restructuring testifies that Karelian industrial branches can be divided into two groups. The first group includes industries, which

have managed, relatively quickly, to find new markets abroad (timber, pulp-and- paper, and metals are the easily exportable items) or retain old domestic markets (e.g., power supply). The second group includes industrial branches which could not survive the competition with foreign producers and with producers from other Russian provinces. The decline in the output of the first group has been much smaller (14.6%) than that experienced by the industries in the second group (50.1%). Thus, there are two principal features of the industrial restructuring in Karelia:

(1) an increasing share of the output due to raw materials (timber and metals) and (2) an enhanced export orientation of Karelian industry - when the share of export grows while the share of sales within Russia declines. For instance, in 1998 the share of export of the total Karelian industrial output was 57%, while that of other Russian regions was approximately 15%. Therefore, it comes as no surprise that the Karelian economy has become increasingly influenced by international commodity prices, which were unstable throughout the 1990s. Consequently, the dynamics of the Karelian industrial output was also unstable. On the one hand, the Republic s industrial output experienced sharp declines in 1994, 1996, and in 1998, when the prices were relatively low. On the other hand, the industrial output grew slightly in 1995, 1997, and in 1999, when the prices were relatively high (http:// www.hkki.fi/-vbi/karelia_ru.pdf [in Russian]; Socio-economical situation .. ., 2002; Statistical 2000 Yearbook .. ., 2000).

In 1999, all branches of Karelian industry achieved substantial growth. The devaluation of the ruble in 1998 made Karelian goods highly competitive on both Russian and foreign markets. Not only Karelian raw materials, but also the products of the Karelian machine-building, woodworking, and food industries have found new market niches. Yet, eventually the growth has ceased.

Because of the sharp decline in both the domestic and national economies, the demand for transportation services fell significantly. Many of the Karelian transport companies could not compete successfully with non-Karelian companies. In addition, a large number of Karelian vessels have been re-registered under foreign flags (Cyprus-registered companies were particularly active in this sense), thus dropping out of the official statistics.

Since the mid-1990s, the Karelian government has begun to actively build new roads and construct new checkpoints along its border with Finland. Consequently, the total length and quality of Karelian roads have been improved. Likewise, the number of private cars increased by 2.4 times over the 1990s.

The building construction industry suffered the most significant decline amongst all sectors of the Karelian economy. Between 1990 and 1998, the value of fulfilled construction contracts declined by 82%. Most large Karelian construction companies went bankrupt. The number of construction workers declined by 67.1%. However, when the economic situation improved in 1999, this sector witnessed one of the highest rates of growth in the Republic (38.8%).

The crisis of the Karelian construction industry is also reflected in the dynamics of housing construction. Over the period 1990-1999, the decrease in construction mounted to 80%. In 1998, Karelia occupied 71st position (out of 89) amongst the Russian regions in terms of newly constructed housing space per capita.

Investments in fixed capital declined by 90% over the 1990-1998 period. It is interesting to note that after the increased value of the ruble in 1995, investments almost halved the next year. An opposite relationship can also be observed: after the ruble was devalued in 1998, the real life investments in fixed capital grew by 53% in 1999. Obviously, the ruble devaluation has made the Karelian economy more attrac- tive for investments, which only ceased growing in 2002 (Druzhinin et al., 2001; Gromtsev et al., 2000; Socio-economical situation .. ., 2002).

In comparison with the national trend, Karelia was relatively successful during 1990-1994 (when it had been profiting from the tax concessions bestowed by the Federal Government). After the concessions were cancelled, the investments in Karelia fell even deeper than in Russia as a whole. Moreover, the substantial economic growth that occurred in 1999 could not change this situation.

In 1999, the main sources of investment were the assets of companies (67.6%), regional and local budgets (10.5%), and loans from banks and other borrowings (7.4% vs. 0.8% in 1998). The remaining 14.5% came from the Federal Government, the state extra-budgetary funds, and from external investors. The largest shares of investments were received by the construction industry (16.9%) (in particular road construction), the pulp-and-paper industry (14.4%), the timber industry (8.3%), housing and municipal services (8.7%), and communications (5.9%). It should also be noted that real life investments in the wood processing sector increased by 10 times, in the industry of construction materials by 3 times, with investment in the food and machine-building industries growing by 50%. Since 2001, however, the investments in industry ceased to grow, but the growth of investments into transport continued (The Republic of Karelia Aaw on the Investment Policy, No. 289-ZRK [in Russian]; Republic of Karelia in Figures .. ., 2003).

Foreign investments into the Karelian economy remained insignificant through- out the 1990s. The accrued investments as of 1 July, 2003 were US$ 93.4 million. The financial contributions from such countries as Cyprus, Germany, the USA, Finland, Norway, and Estonia constituted 34.4%, 22.2%, 10.5%, 8.1%, 7.8%, and 5.5% respectively (Socio-economical situation .. ., 2002).

The number of operating companies with foreign investments grew steadily during 1990-1995. Then, this tendency began declining. For instance, in 1995 Karelia had 211 companies with foreign investments, while in late 1999 this number decreased to 96. More than 90% of the total output of enterprises with foreign investments was represented by timber-related goods.

Because of the economic hardships, the patterns of household consumption also changed dramatically in the 1990s. People spent an increasing share of their incomes on foodstuffs and vitally important services (such as water supply, electricity, and heating). In addition, during the last decade foodstuffs and services became relatively more expensive, while the rise in non-food consumer prices was less significant. Likewise, the prices for alcoholic drinks remained rather low, while real life alcohol consumption was not declining.

Over the 1990s, the structure of Karelian export underwent a dramatic change. The export of pulp grew 16 times, iron ore pellets 5.2 times, roundwood 3.9 times, and export of thin paper 2.9 times. At the same time, the export of lumber dropped

by two-thirds, fish by 35%, and the export of services by 87%. Karelian export of tractors and machines ceased completely.

Foreign trade plays an extremely important role in the Karelian economy. In 1999 for instance, Karelia exported 63.9% of locally produced roundwood, 67.3% of thin paper, 64.0% of pulp, 76.5% of lumber, 98.4% of aluminum, 40.0% of fish, and 39.4% of iron ore pellets. The structure of Karelian export consisted mainly of pulp- and-paper products (31.7% in 1999), timber and lumber (29.2%), metals (15.4%), and ores (10.4%). The share of the machine-building industry was very low (just 2.1%). The structure of export from Karelia has been stable over the past several years, and will not change significantly in the future, except that the construction of wood processing plants and introduction of tariffs on the roundwood export may result in a decrease of the share of unprocessed timber and raise the share of lumber (Socio-economical Situation .. ., 2002).

Karelian import is dominated by machine-building equipment and goods (32.0% in 1999), oil and chemical goods (20.1%), pulp and paper products (17.6%), and foodstuffs (15.0%). The main trading partners of Karelia are Finland (32.5% in export and 30.5% in import), England (9.6% and 2.5%, respec-

tively), Norway (5.2% and 11.1%), and Sweden (6.3% and 2.5%).

The Government of Karelia actively promoted the privatization of public enter- prises. This process was particularly active in 1992-1994, when more than one-half of public enterprises were privatized. By 1997, the privatization had largely been completed. As of 1 January, 2000 only 13.5% of all enterprises remained owned by the government. However, it appears that this process has not achieved its aim to give new efficient owners to Karelian enterprises.

Over the 1991-1999 period, the real per capita income in Karelia declined by almost 65%. This was in line with the national trend. It was only in 1993/1994 that the population enjoyed some growth in their personal real life incomes. Perhaps this was a result of the federal tax concessions. Since 1995, however, real incomes have steadily declined until their gradual increase commenced as late as in 2000.

In 1990-1998, the Karelian economy lost one-quarter of its jobs, while in Russia as a whole the loss was far smaller, reaching 15.5%. Correspondingly, Karelia experienced higher rates of unemployment compared to the mean national level. Unemployment in Karelia became a particularly serious problem in the summer of 1990.

The decline in the number of jobs was partially compensated for in Karelia by job creation in trade and catering and in the public sector. This is rather surprising, given, first, that the real life trade turnover declined continuously and, second, that the public sector experienced severe financial problems. Karelia possesses a signifi- cant amount of forest resources and ore deposits. There are 643 assured deposits, of which only a minor number are being exploited. Owing to the decline in the timber industry, the area of land under forests grew during the 1990s. The Republic set up two natural parks Vodlozersky and Paanajarvi . They are amongst the largest in Europe. The territory of state-protected areas increased to 5.3% of the total area of the republic.

The volume of allowable tree felling declined from 10.6 million m3in 1990 to 9.5

Sec. 7.5]

Investments 287

GRP

50 Atmospheric

emissions

Wastewater discharges

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 7.18. Dynamics of the main ecological indices compared to the GRP. The year 1990 is assumed as a benchmark (i.e., 100%).

From The Republic of Karelia in Figures ... (2003), and Socio-economical Situation ... (2002).

million m3in 1998. At the same time, the actual timber harvests decreased from 9.3 to 6.2 million m3(i.e., by one-third). This means that during all these years Karelia underused its available forest resources.

The industrial decline has led to some improvement in the ecological situation in Karelia. The quantity of industrial waste discharges has decreased sharply (Figure 7.18).

7.5 INVESTMENTS

7.5.1 Foreign investment

The White Sea region has not been very attractive for foreign investments. The Komi Republic presents in some sense an exception. The major part of investment there was made into the development of the fuel and energy sector. The bulk of foreign investment in Russia is channeled to some industrial centers, first and foremost Moscow (greater than 50%). The share of the White Sea region is rather low (Table 7.36, Figure 7.19).

It is worth mentioning that investment sometimes came not only from inter- national financial organizations, but also from large private companies. Foreign financial fluxes are mostly channeled to the development and renovation of the fuel/energy and forest sectors, as well as small business (e.g., food industries) (Gromtsev et al., 2000; Druzhinin et al., 2001).

7.5.2 Domestic investments

Most domestic investments in the Russian Federation go to oil and gas provinces and the Moscow region. The investment proportion assigned to the White Sea region is far lower, but domestic investment is greater than foreign and plays a substantial role in the development of the industry and infrastructure in the area (Figure 7.20 and Tables 7.37 and 7.38).

Table 7.36. The flux of foreign investments (in million US$ with due account of the ruble share).

From Socio-economical Development .. . (2003).

1994 1995 1996 1997 1998 1999 2000 2001 2002

Date: 2016-03-03; view: 670