The gross domestic product for the first three quarters of 1996 amounts in current prices to 1,609 trillion rubles, indicating a decline in GDP of 6% in constant prices compared to the same period in 1995. According to estimates of the Ministry of Economy for 1996, real GDP will decrease by 5% and the GDP deflator will be 148. Industrial output has declined by 6.5%, and by 8% for large and medium size enterprises. The situation is better in extractive industries, even given the real ruble rate appreciation, but worse in process industries, which account for two thirds of overall production output. Such deterioration of the economic situation rules out much likelihood of economic growth at present, while the chances of the Russian economy entering a depression seem quite real.

The fuel and energy sector is reasonably stable. Compared to the same period in the previous year, production has declined by 0.6% in the electricity sector, by 2% in the oil sector, by 4% in oil refining, by 0.1% in gas, and by 5% in coal mining. The situation in the ferrous and non-ferrous metallurgy, and chemical and petrochemical industries has noticeably deteriorated from the previous year. In 1995, for the first time during Russia's transition to a market economy, these sectors registered output growth. However, over the first three quarters of the current year, their outputs have sagged from 1995's results: in the ferrous metallurgy industry by 4%, in the non-ferrous metallurgy industry by 5%, in the chemical and petrochemical industries by 13%, in machinery by 14%, and in the construction materials industry by 25%.

The tough monetary policy, which was primarily aimed at curbing inflation, has resulted in tough budget constraints for industrial enterprises. Average monthly growth rates of arrears equaled 8%. Inter-enterprise arrears have swollen as well: in 1995 the share of unpaid products averaged 13%, while in the first six months of 1996 this index rose to 20%. Overdue payments to the budget increased on the average by 6% a month and as of September 1, 1996 approximated 30% of the overall consolidated budget revenue. The fastest growing sector was overdue payments to off-budget funds, which soared by 26% a month. Barter operations, using cashless mutual settlements and promissory notes, came to be widely used. According to questionnaires sent to enterprise managers by the Economic Conditions Centre and the Russian Economic Barometer, the structure of the 1996 inter-enterprise settlements is as follows: barter transactions account for 37-40% of transactions (in metallurgy and fuel and energy complex the share of barter goes up to 50-56%), promissory notes for 10-12%, payments in cash for 10-15%, and non-cash transactions for 20-30%.

The investment crisis is one of the key aspects of the current transition period in Russia. Over the first three quarters of 1996, investment has dropped by 17% compared to January-September of 1995. Productive investment experienced the deepest fall, by 20-22%, while non-productive investment dropped by 10-12%. Nearly 80% of investments are made out of internal funds of enterprises. Investment by the state has been insignificant. The 1996 state investment program is expected to be executed by 30-35% of the targeted values. In 1996, foreign investment into the Russian economy will amount to US$3-3.5 billion, while the 1997 forecast is US$3.5-4.0 billion.

The federal budget deficit is at 5.4% of GDP, which is significantly above the targeted 3.85% of GDP. Funds raised internally, mainly through issuance of government securities, have accounted for 62% of the budget deficit financing. At the same time, expenditures on ginternal debt servicingh have increased to 2.0% of GDP.

As of the end of September 1996, the econo-mically active population (EAP) equaled 72.6 million people, or 49% of the country's total population. 6.7 million people (9.2% of EAP) did not have a job, but were actively looking for one and were, therefore, in accordance with the methodology of the International Labor Organization, classified as unemployed. Officially registered as unemployed by employment agencies were 2.5 million people, or 3.4% of EAP. Some experts believe that, while production volumes and effective demand are decreasing, the Russian economy still has excess productive potential, in particular, excess employment. This results in unjustified growth of costs incurred by enterprises and, consequently, in deterioration of their financial positions, which results in declines in working capital and failure to pay wages on time. Average wage arrears in industry have leaped from 17 days in 1995 to 40 days in the third quarter of 1996.

Real disposable income has declined over January-September 1996 by 0.8% compared to the same period of 1995. Employee compensation makes up 44.0% of total household income, social transfers 13.3%, property income 5.9%, and income from entrepreneurial activities 36.8%. Social stratification, which worsened rapidly at the beginning of market reforms, has improved slightly: the Gini coefficient has edged down from 0.382 in 1995 to 0.376 in 1996 and the ratio of incomes of the richest 10% and the poorest 10% of the population has fallen from 13.4 to 12.9. While in 1995 the share of the people with incomes below the subsistence level equaled 26% of the entire population, in 1996 it has dropped back to 22%.

The Central Bank of Russia is planning to preserve the sloping currency corridor for the ruble exchange rate. The real ruble rate is likely to strengthen somewhat, which will stimulate import growth. Over the first three quarters of 1996, Russia's foreign trade turnover has risen to US$111.4 billion (558.4 trillion rubles), or by 10% over the level of January-September 1995. This includes US$63.6 billion (318.8 trillion rubles) in exports, an increase of 8%, and US$47.8 billion (239.6 trillion) in imports, a rise of 12%. The trade surplus has fallen to US$15.8 billion (in January-September 1995 the surplus was US$16.2 billion). The main factors negatively effecting external trade growth are the strengthening of the real ruble rate, increases in a number of foreign trade tariffs and excise duties, and a fall in domestic demand. Factors stimulating foreign trade are the favorable external market conditions (taking into account that Russian exports are raw material-oriented) as well as inter-enterprise mutual arrears.

The government has prepared two basic scenarios regarding Russia's economic development in 1997. According to the first, optimistic, scenario, GDP growth will equal 0-2%, with the inflation rate at 10-13% a year. The principal parameters of the second scenario are a 1-3% decline in GDP and a 21-25% rise in prices. It should be noted that when developing its monetary policy targets and state budget the government proceeds from the optimistic variant. However, the majority of alternative assessments show that in the coming year the parameters of the second scenario seem more realistic. Besides traditional political instability the main threats to Russia's economic development in 1997 will be: (a) a continuing budget crisis provoked by low tax collection capabilities; (b) the deteriorating financial positions of industrial enterprises; (c) declining real household income; (d) a growing dependence on imports, the strengthening of the real ruble rate, and, consequently, the likely deterioration of the foreign trade balance; and (e) the volatility of domestic financial markets, especially the government securities market. Clinging to the optimistic scenario and underestimating existing dangers could result in the failure of stabilization measures and worsen Russia's investment climate in 1997.

Japan Society for the Promotion of Science Research Fellow