. Last Updated: 07/27/2016

While Exports Soar, Domestic Sector Falls Flat

Russia's export-oriented industries took the biggest strides forward in 1995, while sectors focused on the domestic market were among the year's biggest losers, according to experts and analysts.

The chemical and metal industries were among last year's most bullish economic sectors, but light industries, such as textiles and footwear, dipped the most in output figures -- in some cases nearly 30 percent.

Concentrating their efforts on exports, 1995's winners built up hefty financial reserves and staved off the severe decline in an economy that contracted overall by an estimated 4 percent, analysts said.

"After the collapse of the Soviet Union these branches suffered a lot from the loss of traditional markets in the former Soviet republics, but they managed to totally re-orient their production toward exports," said Mikhail Delyagin, a senior analyst at the Presidential Analytical Center.

Recent government attempts at gradually reducing export duties and regulations also contributed to the sectors' success, experts said.

Russian chemical companies increased exports of fertilizers by 21 percent last year, while metals firms boosted nonferrous exports by 41 percent, and exports of nickel by 21 percent.

"These industries have already integrated into world markets," said Sergei Pavlenko, head of the government Working Center of Economic Reforms.

According to preliminary estimates, overall exports climbed more than 31 percent last year to $63 billion, compared with $48 billion in 1994, said First Deputy Prime Minister Oleg Soskovets in an interview with Itar-Tass. He attributed the rise to "the advantageous climate of the world market and limited demand within Russia."

Even the ruble corridor -- widely perceived as harmful to exporters -- has not stopped expansion of these sectors.

Overall production in the chemical industry rose by 10 percent last year , while ferrous metal production jumped by 9 percent and nonferrous metal production by 3 percent, according to data from the Presidential Analytical Center.

For the Novolipetsk metallurgical complex, prospects were so buoyant last year that the company doubled its exports of rolled steel despite the corridor's effect on export earnings, said Vitaly Mamyshev, the plant's chief production engineer.

The competitive position abroad of Russian metals companies was considerably enhanced by their ability to undersell the competition, said an analyst with Metal Finance, an industry newsletter.

In the steel market, for example, Russian mills charge about $100 less per ton than their West European counterparts, and are blazing the way in emerging markets such as Southeast Asia and Africa, said the analyst, who asked not to be identified.

Additional momentum may come from important inroads made in privatizing this traditionally off-limits economic sector. In November the government auctioned 38 percent of Norilsk Nickel, one of the world's biggest nickel producers. Uneximbank won the stake with a $170 million bid.

While major investments have been kept on hold, foreign investors are flooding into metals, their hopes for profits raised by auctions of such sacred cows.

A U.S. firm has bought a 20 percent stake in the Kirovsky nonferrous metals factory in the Central Russian city of Vyatka, and another American company, the trading concern Trans Commodities, has expressed interest in bidding for an 18 percent stake in the Magnitogorsk metal complex.

But analysts caution that the obsolescence of many Russian metal plants means this industry is still a high-risk bet.

Government officials agree. "The present growth is good, but it is just [the result of] Soviet-style production without any improvement in technology. Modernization is what we urgently need," said Vyacheslav Yepifanov, head of the State Metallurgy Committee's investment department.

Despite the impressive numbers, experts predict that the rapid growth of the metal and chemical sectors will come to a close in 1996, stunted by increased government attention to sectors oriented toward the domestic market.

Perhaps indicative of the slowdown in export-oriented sectors, Russia's energy industry stood out more last year for privatization and reorganization than for impressive gains in production.

With mammoth LUKoil leading the way, the industry's oil generals spent much of 1995 acquiring strategic refineries and production facilities from the government, gradually building 12 vertically integrated companies that drill for, process and sell oil.

According to the State Statistics Committee, overall oil production was 256 million tons in the first nine months of 1995, down 3 percent compared with the like period in 1994. Exports fell 5 percent year-on-year, totaling 102 million tons and earning $10.22 billion.

The government attempted to privatize the oil industry with share tenders, cash auctions and loans-for-shares deals, swapping control of state stakes in companies for cash loans.

In the auctions of Sidanko and Yukos, the banks handling the sell-offs ruled out competitors and won the bids themselves. Surgutneftegaz created an employee pension fund, which won the auction. The upshot of the process is that while more of the industry is in private hands, each ownership deal has come under critics' fire and court challenges.

Foreign investors stayed aloof most of the year, preferring to keep key investments on hold until parliament hammered out a production-sharing bill.

In taking up the problems of domestically focused sectors, the government may have bitten off more than it can handle. Such sectors did much worse last year than sectors aimed at exports.

Banks, one of the cash cows of Russia's early reform years, faced huge problems in 1995 as traditional sources of revenue dried up.

The introduction of the ruble corridor and the August banking crisis have forced banks to turn away from hard-currency speculation and interbank credit operations and focus on investments with less promise of rapid returns.

But such losses pale in comparison with the damage done to light industry, expecially textiles, shoes, leather and fur.

Light industry ranked as 1995's biggest loser, with a dramatic fall in production of 28 percent.

Indicative of light industry's slump, a whopping 44 percent of the sector's work force worked less than a full week during October, according to data from the State Statistics Committee.

Vladimir Gusev, the head of the State Duma's industry committee and a former Soviet deputy prime minister in charge of light industry, put the blame for the industry's malaise squarely on the government's shoulders.

"The government failed to provide the 330 billion rubles [$73 million] that the budget allocated for capital investment" in 1995, Gusev said. "Instead, it let everybody import cheap foreign fabrics and other goods that are squeezing Russian products from the market." But according to the presidential analyst Delyagin, economics rather than sloppy government planning is the real culprit.

Outdated technologies, the breakdown of traditional ties with commercial partners in former Soviet republics and lingering Soviet-style management have all taken their toll, Delyagin said.

"It is much more profitable for a director of a textile factory to buy cotton in Uzbekistan and sell it again abroad as a raw material rather than produce a low-quality sheet and not know what to do with it," he said. "Light industry is a complete loser and, it seems, will remain one for a long time."

But neither have things improved for the industry's foe, the traditionally favored military-industrial complex.

While most major weapons manufacturers have halted production and slashed personnel, the government is still wary about restructuring this once-powerful sector. Under fire from industry lobbyists, it backed off from auctioning shares in defense giants like the Sukhoi design bureau and the Irkutsk and Ulan-Ude aviation companies.