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GDP. Gross domestic product totaled 2684.5 billion rubles in 1998 (2562.6 billion rubles in 1997). Real GDP decreased by 4.6%, while in 1997 real GDP increased by 0.8%. Annual trend of the Main Industries production index was steadily lower through 1998 as compared to 1997. The major fall in industrial production occurred in September 1998 because of the banking crisis and distraction of the payment system. In the structure of GDP by source the share of services has been continuing to increase: from 49% of GDP in 1996 to 51.4% in 1997, and 53% in 1998. But the increase happened primarily due to the reduction in the production of goods.

In the GDP structure by use the share of private consumption increased from 51.6% in 1997 to 53% in 1998. Relative growth of household spending on goods and services is explained by a decrease in private savings. Last year the share of government consumption decreased significantly - by more than 22% due to a reduction in state administration and other expenditure, in particular investments. Sharp devaluation of the ruble led to an increase of net export as a share of GDP. However, net export in dollar equivalent decreased.

In the structure of GDP by income formation the share of gross profit in the economy decreased again and gross income reached 38% in 1998. The share of net taxes on production and import decreased as well and reached 13.4%. Consequently, the share of wages rose to 48.2%.

Industry. Total volume of industrial production in current prices amounted to 1658.4 billion rubles. Real industrial production fell by 5.2% in 1998 as compared to 1997 (in 1997 industrial production grew by 2.0% as compared to 1996). In the first half of the last year industrial production was on the level of 1997, but in July-September industrial output decreased by 11.8%, in October-December - by 8.2% (compared to the corresponding periods of 1997).

Sharp decrease in 1998 occurred in textiles (-11.5%), machine building (-7.5%), chemical and petrochemical (-7.5%). However, in 1997 industrial output rose in machine building (by 3.5%), in chemical and petrochemical (by 2.0%). Production output also decreased in fuel, ferrous metallurgy and non-ferrous metallurgy.

Financial situation of enterprises deteriorated in 1998: net balance of profits and losses of enterprises accounted for 12.4 billion rubles as of the 1st of December 1998 (72.2 billion rubles in 1997). Overdue credit debt amounted to 701.3 billion rubles as of the 1st December 1998 (the same indicator for 1997 was 514.2 billion rubles).

Investment. Fixed investment was 402.4 billion rubles, decreased in nominal terms compared to 1997 level of 408.8 billion rubles. In real terms capital investments decreased by 6.7%. This reduction was primarily due to a reduction in public investment: from planned implementation of 267 industrial and social projects, actually the government implemented only 15. For every fifth project planned to be completed in 1998, the construction did not started at all.

1998 Federal budget execution. According to 1998 Federal Budget Law federal budget revenue was planned to be 367.5 billion rubles. According to the preliminary data, gross revenue amounted to 302.4 billion rubles in 1998 or 82.3% of the planned level. Tax revenue accounted for 236.0 billion rubles or 76.9% of the planned level. Federal budget expenditure totaled 388.9 billion rubles, which amounted to only 77.8% of 1998 budget targets. Obviously, the underexecution of the federal budget was primarily due to the unrealistic budget targets for revenue and the financial crisis.

In 1998 the Government intended to stop allowing mutual off-sets in revenue collection. However, total off-sets amounted to 30 billion rubles last year.

Budget revenue was 11.3% of GDP in 1998 (excluding final accounts), budget revenue in 1997 was 12.6% of GDP. Budget revenue reduction occurred primarily due to the decrease in tax revenue. Tax revenue was 8.8% of GDP in 1998 (about 10% in 1997). Reduction in nominal terms happened in almost all tax items. There was a decrease in VAT collection: in 1997 VAT proceeds amounted to 128.6 billion rubles (5.0% of GDP), in 1998 - 104.7 billion rubles (3.9% of GDP). This decline is closely connected with the deterioration in tax collection. Last year tax arrears on VAT were about 50%. Profit tax proceeds were 34.9 billion rubles or 1.3% of GDP (36.3 billion rubles or 1.4% of GDP in 1997). The decrease in profit tax revenue was due to the reduction of gross profits of enterprises.

Budget expenditure was 14.5% of GDP in 1998 down from 19.4% of GDP in 1997 (including GKO interest payments). This happened because of non-interest expenditure reduction to 282.3 billion rubles (378.5 billion rubles in 1997). Therefore, real non-interest expenditure (in percent of GDP) declined as well - from 14.8% of GDP in 1997 to 10.5% of GDP in 1998. Expenditure on national defense decreased by 5.6 billion rubles and amounted to 56.7 billion rubles (from 2.4% of GDP in 1997 to 2.1% of GDP in 1998). However, budgetary transfers grew to 45.2 billion rubles (by 4.7 billion rubles) or from 1.8% to 2.1% of GDP. Expenditure on social sphere was also increased to 57.2 billion rubles (on 0.4 billion rubles) or from 1.6% to 1.7% of GDP.

Federal budget interest expenditure reduced down to 106.6 billion rubles (from 118.0 billion rubles in 1997) or 4.0% of GDP (4.6% of GDP in 1997). This was primarily a result of government bond market freezing in August 1998. Expenditures on GKO/OFZ servicing were 59.9 billion rubles (87.3 billion rubles in 1997). Mainly because of a sharp ruble devaluation external debt service increased from 23.8 billion rubles in 1997 (0.9% of GDP) to 40.9 billion rubles in 1998 (1.5% of GDP).

Federal budget deficit in 1998, according to the report by the Ministry of Finance, amounted to 86.5 billion rubles or 3.4% of GDP. It should be mentioned that 1998 federal budget deficit takes full account of interest payments on domestic debt.

Federal budget deficit in 1998 by international (IMF) definition amounted to 130 billion rubles or 4.8% of GDP. According to international definition revenue proceeds from privatization and sales of precious metals are included into domestic financing. Besides, IMF credits are also included into domestic financing. In 1997 federal budget deficit amounted to 172.3 billion rubles or 6.7% of GDP.

Net foreign financing accounted for 53.8 billion rubles. Gross borrowings were 90.4 billion rubles, principal repayments - 36.6 billion rubles. (In 1997 foreign credits amounted to 51.2 billion rubles and principal repayments - 10.3 billion rubles.) The main part of foreign loans in 1998 was formed by eurobonds launchings - 59.2 billion rubles (including GKO restructuring in July 1998) or about $9.5 billion.

Net domestic financing (including changes in balances) amounted to 76.2 billion rubles in 1998. Government bond financing was 25.1 billion rubles while net financing from GKO/OFZ market was negative -34.8 billion rubles and interest refinancing was 59.9 billion rubles. Net IMF credits amounted to 4.7 billion rubles, privatization proceeds - 15.2 billion rubles, net proceeds from precious metals sales accounted for 7.9 billion rubles.

Consolidated budget. According to the preliminary data, consolidated budget revenue in 1998 was 657.1 billion rubles or 24.5 % of GDP. (In 1997 consolidated budget revenue was 26.8% of GDP.) The decline in revenues was due to both a reduction in federal and regional budget revenues (transfers to regional budgets are calculated on the basis of federal revenue collection).

Consolidated budget expenditures were implemented in the amount of 753.0 billion rubles or 29.4% of GDP. (In 1997 total expenditures were equal to 806.2 billion rubles or 31.5% of GDP.) Expenditures were reduced due to the reduction in federal budget expenditures (transfers).

Deficit of the consolidated budget amounted to 95.9 billion rubles in 1998 or 3.6% of GDP.

Monetary policy of the Central Bank of the Russian Federation can be separated into two stages - before and after the financial crisis in August. Since the middle of 1995 the Central Bank stopped direct financing of the government and began to maintain a policy of stability of national currency and banking system. The Central Bank has managed to conduct such policy till middle of August 1998 and did not make significant money emission at least through the increase of domestic credit. However, from 17th of August to the end of December exchange rate jumped from 6.2 to 20.7 rubles for a dollar. Money emission exceeded 60 billion ruble and foreign currency reserves decreased by $6 billion.

Monetary base increased by 27.9% in 1998 and as of the 1st of January 1999 it amounted to 210.4 billion rubles (in 1997 the increase in the monetary base was 25.7%). Despite final levels look similar, the dynamics and the structure of the base money in 1998 differed significantly from the corresponding parameters in 1997. In January 1998, after speculative attack on the ruble, foreign reserves of the Central Bank decreased by $2.3 billion, which led to a corresponding decrease in cash in circulation by more than 12 billion rubles. On the 1st of January 1998 base money accounted for 164.5 billion rubles, on the 1st of February - 151.4 billion rubles. From February to August 1998 monetary base increased by 6.8% and on the 1st of September accounted for 161.7 billion rubles. Total decrease in the base money within first 8 months of 1998 was equal to 2% as international reserves went down, while the growth of domestic assets was significant.

Sharp ruble devaluation and freezing of government domestic bond market undoubtedly led to a rise in prices and monetary financing of the budget. Besides, the Central Bank had to support liquidity level of some large commercial banks because of huge deposit withdrawals by households. That imposed a base money increase in September through December 1998 by 30.1%, while cash money increased by 40.6% or more than 57 billion rubles.

Net international reserves (NIR) at the beginning of 1998 were 22.4 billion rubles. The dynamics of NIR correlated a lot with the Central Bank's support of the exchange rate stability and receiving of external loans. So, in January 1998 the NIR amounted to 17 billion rubles, in April 1998 after receiving the first tranche of Eurobonds the NIR increased by 11 billion rubles. Next NIR growth was in June after receiving funds from June Eurobonds launch - 9.2 billion rubles. However, already on 1st August the NIR were negative -5.3 billion rubles, on 1st September - -40.6 billion rubles. In September-December 1998 the NIR changed insignificantly and on 1st January 1999 were -38.9 billion rubles.

Net domestic assets (the NDA) on 1st January 1998 amounted to 141.2 billion rubles. Through January-June 1998 the Central Bank implemented tight monetary policy that was expressed in limited provision of loans to the government and banks. During the first half of 1998 the NDA increased by 9% and reached 154 billion rubles, while net credits to the government rose by only 6%. August crisis led to the NDA growth both because of credits to the government and loans to the banking sector. In August the NDA increased by 35.7 billion rubles, net credit to the government rose by 13.5 billion rubles and net credit to banks - 25.2 billion rubles. Total increase of NDA in 1998 amounted to 76.6%. This growth happened due to the increase in credits to the government that in 1998 accounted for 85 billion rubles.

The volume of required reserves decreased from 27.5 billion rubles on the 1st of January 1998 to 12.5 billion rubles on the 1st of January 1999. From February last year the Central Bank set a uniform interest rate on required reserves of 11%. At the end of August this rate was decreased to 10%, from September the Central Bank introduced differentiated interest rates of 7.5% and 5%, and from 1st December - a uniform rate of 5%. The decrease of reserve requirements was a continuation of softening of monetary policy by the Central Bank and reflected the intention of the CBR to increase liquidity of the banking system.

According to the preliminary data, broad money supply (M2) amounted to 452 billion rubles on the 1st of January 1999 implying the increase by 78 billion rubles from the end of 1997. Therefore, M2 growth in 1998 was 20.8% (In 1997 M2 growth was equal 26.7%.) Households' and enterprises' deposits did not nearly changed, which meant that the money supply rose only due to the increase in cash. Besides, adjusting for inflation households' and enterprises' deposits decreased in real terms.

Velocity of money was 7.1 in 1998 and decreased by 14% as compared with 1997 level. However, the fall in money velocity occurred in the first half of 1998, in particular, in May the velocity reached 6.3, which reflected the liquidity crisis in the economy rather than any increase in the demand for money. In the second half of the last year money velocity increased showing a decrease in money demand.

Inflation. Consumer price index amounted to 84.4% in 1998 (11.0% in 1997). The increase in consumer prices for food was 96.0%, non-consumer goods - 99.5%, paid services - 18.3%. In the first half of the year inflation was insignificant, and annualized inflation did not exceed 10%. From August through December prices increased by 76.9%; the main increase was in September - 38.4%, and in December - 11.6%. However, in September the main reason for the price increase was ruble devaluation, while in December inflation was due to the base money growth in autumn.

Producer price inflation amounted to 23.2% in 1998 (7.5% in 1997). Prices on fixed capital goods increased by 18.3%, on intermediate goods - by 12.2%, on consumer goods - by 53.4%. There were significant price increasesfor products of non-ferrous metallurgy - by 76.1%, food industry - by 52.9%. The lowest price rise was reported for goods of fuel industry - by 0.8% that reflected a decrease in prices in oil-extracting industry by 10%.

Households money income per capita accounted to 970 rubles increased by 3.8% in nominal terms compared to 1997 level. Real household income decreased by 18.2% in 1998. (In 1997 real money income increased by 22.4%.) Therefore, the deflator on money income amounted to 126.9%. In the structure of money income the shares of wages and income from households' activity increased, while the share of social transfers decreased due to the growth in pension and subsidy arrears.

Real monthly wage rate (on accrued basis) fell by 13.8% in 1998 as compared to 1997 level. The average monthly wage rate amounted to 1095 rubles. Total wage arrears were 77.0 billion rubles on the 1st of January 1999 (consolidated budget arrears were 19.7 billion rubles). Nonetheless, in December 1998 arrears decreased by 8.0 billion rubles (2.4 billion rubles due to consolidated budget).

Real pensions decreased by 4.8% in 1998 as compared to 1997 level.

In December 1998, real wages and pensions were 25 to 30 percent down from the December 1997 level indicating a drastic reduction in the real level of income and standards of living.