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TABLE OF CONTENTS

Item

Page

Explanatory notes

viii

Abbreviations

ix

Preface

xi

Chapter 1 OVERVIEW AND POLICY ISSUES

1

1.1 Overview of the ECE economies in late 1998

1

1.2 Policy lessons from the Russian crisis

7

(i) Institution building

8

(ii) Political will in democracies

10

(iii) Second-best solutions

10

(iv) Broader implications

11

Chapter 2 RECENT MACROECONOMIC DEVELOPMENTS IN THE ECE REGION

15

2.1 The global context

15

(i) Turmoil in financial markets

15

(ii) Deteriorating performance of the world economy

17

2.2 The economic situation in western Europe and North America

20

(i) Recent macroeconomic developments

20

(ii) Monetary conditions and fiscal policy

26

(iii) The short-term economic outlook

28

2.3 The transition economies

30

(i) The global financial crisis and its impact on the ECE transition economies

30

(ii) The economic pattern in the first three quarters of 1998

48

Chapter 3 FOREIGN TRADE OF TRANSITION ECONOMIES

71

3.1 Introduction

71

3.2 Eastern Europe and the Baltic states

75

(i) Trade performance in the first half of 1998

75

(ii) Trade balances

81

(iii) Outlook for trade in the wake of Russian and global financial turmoil

85

(iv) Changes in relative factor intensities of exports to western Europe

88

3.3 Trade of the CIS countries

94

(i) Russian Federation: trade with non-CIS countries

94

(ii) Other CIS countries: trade with non-CIS countries

97

(iii) Intra-CIS trade

99

(iv) Recent trade policy developments in the CIS

103

Chapter 4 EXTERNAL FINANCIAL DEVELOPMENTS IN THE TRANSITION ECONOMIES

107

4.1 Introduction

107

4.2 Current account developments

107

(i) Current account balances

107

(ii) Growth of trade in goods and services

109

(iii) Current account imbalances and vulnerability

111

4.3 External financial developments in the transition economies

113

(i) Net financial inflows

113

(ii) Funds raised on the international financial markets

117

(iii) Foreign direct investment

120

(iv) Capital inflows after the partial Russian default

123

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4.4 Official reserves and external debt

125

(i) Foreign currency reserves

125

(ii) External debt

125

4.5 Outlook for current account balances, financing and FDI

127

Annex table to chapter 4

131

Chapter 5 A NOTE ON PRODUCTION SHARING IN RUSSIA

135

Abstract

135

5.1 Introduction

135

5.2 PSAs and their international application

136

5.3 State of development of PSA projects in Russia

137

5.4 Russia’s PSA law

140

(i) Background and objectives of the initial version

140

(ii) Obstacles to projects under the PSA law

141

(iii) The remaining legislative agenda

143

5.5 The macroeconomic considerations

144

5.6 Recent developments, prospects and policy choices

145

(i) The stalling of PSA legislation

145

(ii) In the shadow of world commodity markets

146

(iii) Tighter financing constraints

147

(iv) Conclusions

148

STATISTICAL APPENDIX

151

LIST OF TABLES

Table

Page

2.1.1 World commodity prices, 1996-1998

19

2.1.2 Depreciation and appreciation of east Asian curencies against the dollar, 1997-1998

20

2.2.1 Quarterly changes in real GDP, 1997-1998

22

2.2.2 Growth contributions to quarterly changes in real GDP, 1997-1998

22

2.2.3 Consumer prices in the developed market economies, 1997-1998

24

2.2.4 Standardized unemployment rates in the developed market economies, 1996-1998

25

2.2.5 Real GDP in the developed market economies, 1996-1999

29

2.3.1 Selected economic indicators in the Russian Federation, 1993-1998

35

2.3.2 Baltic states’ and eastern Europe’s trade exposure to the CIS market, 1992, 1997 and 1998

45

2.3.3 Export exposure of selected transition economies to the Russian Federation and CIS, as a share of GDP, January-September 1998

46

2.3.4 General government budget balance in selected ECE transition economies, 1992, 1996 and 1997

46

2.3.5 Basic economic indicators for the ECE transition economies, 1996-1999

49

2.3.6 International trade and external balances of the ECE transition economies, 1996-1998

50

2.3.7 GDP and industrial output in the ECE transition economies, 1997-1998

52

2.3.8 Retail trade in selected transition economies, 1997-1998

53

2.3.9 Consumer prices in the transition economies, 1997-1998

58

2.3.10 Producer prices in industry in the transition economies, 1997-1998

62

2.3.11 Wages and unit labour costs in industry in the transition economies, 1997-1998

63

2.3.12 Total employment in transition economies, 1995-1998

65

2.3.13 Registered unemployment in the transition economies, 1997-1998

67

3.1.1 Foreign trade of the ECE transition economies by direction, 1996-1998

72

3.1.2 Trade balances of the ECE transition economies, 1993-1998

73

3.1.3 Changes in the volume of foreign trade in selected transition economies, 1995-1998

74

3.2.1 Foreign trade of the CEFTA countries by direction, 1996-1998

76

3.2.2 Foreign trade of south-east European countries by direction, 1996-1998

77

3.2.3 Foreign trade of the Baltic states by direction, 1996-1998

78

3.2.4 Trade by commodity in the CEFTA countries, 1994-1998

79

3.2.5 Trade by commodity in south-east European countries, 1994-1998

80

3.2.6 Trade in selected commodity groups in the Baltic states, 1994-1998

82

3.2.7 Foreign trade price developments in selected east European countries, January-June 1998

83

3.2.8 Baltic states’ and eastern Europe’s exports to the Russian Federation by commodity, 1994-1997

87

3.2.9 East European and Baltic countries’ exports to western Europe in respect of factor intensity, 1993-1996/97

90

3.2.10 East European and Baltic countries’ exports of manufactures to western Europe in respect of factor intensity, 1993-1996/97

91

3.3.1 CIS countries’ total trade, 1996-1998

95

3.3.2 CIS countries’ trade with CIS and non-CIS, 1996-1998

96

3.3.3 Non-CIS trade of the Russian Federation by selected commodities, 1994-1998

97

3.3.4 CIS countries’ trade with the Russian Federation, 1994-1997

101

3.3.5 International barter trade of selected CIS countries, 1995-1997

102

4.2.1 Current account balances of eastern Europe, the Baltic states and the CIS, 1995-1998

108

4.2.2 Foreign trade in goods and non-factor services of eastern Europe, the Baltic countries and European members of the CIS, 1996-1998

110

4.2.3 Shares of current account deficits covered by FDI inflows, 1996-1998

112

4.3.1 Net capital flows into eastern Europe, the Baltic countries and European members of the CIS, 1995-1998

114

4.3.2 Net capital flows into eastern Europe, the Baltic countries and three European members of the CIS, by type of capital, 1995-1998

114

4.3.3 Foreign portfolio investment in east European, Baltic and European CIS countries, 1996-1998

115

4.3.4 Medium- and long-term funds raised on the international financial markets by eastern Europe, the Baltic countries and the CIS, 1993-1998

118

4.3.5 Bond issues planned for completion in 1998

121

4.3.6 International equity issues of eastern Europe, the Baltic countries and the CIS, 1994-1998

121

4.3.7 International credit ratings of eastern Europe, the Baltic countries and the CIS

122

4.3.8 Foreign direct investment flows of east European, Baltic and European CIS countries, 1996-1998

123

4.3.9 Indicators of foreign direct investment in east European, Baltic and European CIS countries, 1996-1998

124

4.4.1 Official reserves and total external debt of eastern Europe, the Baltic countries and European members of the CIS, 1996-1998

126

4.4.2 Indicators of external debt of eastern Europe, the Baltic countries and European members of the CIS, 1995-1998

127

5.2.1 International petroleum agreements: distribution of production sharing agreements and concessions in the 1990s

138

5.3.1 Production sharing agreements in the Russian oil and gas industry on which negotiations were initiated prior to PSA law

139

5.4.1 Taxation system applying to oil production in the Russian Federation under the concession (T/RA) system

141

5.4.2 Lists of subsoil blocks to be developed under PSA legislation

143

5.5.1 Estimated impact of the production sharing regime on oil production and tax revenue

145

A.1 Real GDP in the ECE market economies, 1983-1997

152

A.2 Real private consumption expenditure in the ECE market economies, 1983-1997

153

A.3 Real general government consumption expenditure in the ECE market economies, 1983-1997

154

A.4 Real gross domestic fixed capital formation in the ECE market economies, 1983-1997

155

A.5 Real total domestic demand in the ECE market economies, 1983-1997

156

A.6 Real exports of goods and services in the ECE market economies, 1983-1997

157

A.7 Real imports of goods and services in the ECE market economies, 1983-1997

158

A.8 Industrial output in the ECE market economies, 1983-1997

159

A.9 Total employment in the ECE market economies, 1983-1997

160

A.10 Standardized unemployment rates in the ECE market economies, 1983-1997

161

A.11 Consumer prices in the ECE market economies, 1983-1997

162

B.1 Real GDP/NMP in the transition economies, 1980, 1984-1997

163

B.2 Real total consumption expenditure in the transition economies , 1980, 1984-1997

164

B.3 Real gross fixed capital formation in the transition economies, 1980, 1984-1997

164

B.4 Real gross industrial output in the transition economies, 1980, 1984-1997

165

B.5 Total employment in the transition economies, 1980, 1984-1997

166

B.6 Registered unemployment in the transition economies, 1990, 1993-1997

167

B.7 Consumer prices in the transition economies, 1989-1997

168

B.8 Producer price indices in the transition economies, 1989-1997

169

B.9 Nominal gross wages in industry in the transition economies, 1990-1997

170

B.10 Merchandise exports of the transition economies, 1980, 1985-1997

171

B.11 Merchandise imports of the transition economies, 1980, 1985-1997

172

B.12 Balance of merchandise trade of the transition economies, 1980, 1985-1997

173

B.13 Merchandise trade of the transition economies by direction, 1980, 1985-1997

174

B.14 Exchange rates of the transition economies, 1980, 1985-1997

175

B.15 Current account balances of the European transition economies, 1990-1997

176

B.16 Inflows of foreign direct investment in the transition economies, 1990-1997

177

LIST OF CHARTS

Chart

Page

2.1.1 International share prices, January 1997-October 1998

17

2.1.2 World commodity prices, January 1996-October 1998

18

2.1.3 Average monthly nominal exchange rates against the dollar, January 1997-October 1998

19

2.2.1 Business cycle indicators for the European Union and the United States, January 1994-October 1998

21

2.2.2 Quarterly changes in real GDP in the developed market economies, 1995 QI-1998 QII

23

2.2.3 Nominal short-term interest rates, January 1996-September 1998

27

2.3.1 Forex reserves, central bank refinancing rate and yield on T-bills in the Russian Federation, 1995-1998

32

2.3.2 Ex-post real interest rates on short-term commercial credit in the Russian Federation, 1995-1998

36

2.3.3 Share of barter and share of loss-making enterprises in Russian industry, 1993-1998

37

2.3.4 Indices of real gross industrial output in the Russian Federation, 1993-1998

37

2.3.5 Russian Federation: stock of payables arrears as percentage of 12-month GDP, 1995-1998

38

2.3.6 Wage arrears in the Russian Federation as percentage of the economy-wide monthly wage fund, 1993-1998

38

2.3.7 Measures of Russian domestic debt burden, 1994-1998

40

2.3.8 Measures of the relative weight of Russian domestic debt, 1994-1998

41

2.3.9 Stock market indices in selected transition economies, 1 January-31 October 1998

42

2.3.10 Indices of the nominal exchange rates of selected transition economies against the dollar, 1 January-31 October 1998

44

3.1.1 Specific western demand for selected transition countries’ exports, 1993-1998

74

3.2.1 Dynamics of indicators of export competitiveness in selected countries of eastern Europe, 1994-1998

84

3.2.2 Changes in composition of east European and Baltic countries’ exports to western Europe in respect of factor intensity, 1993, 1996 and 1997

93

4.3.1 Interest rate differentials in selected transition economies, 1995-1998

116

4.3.2 Interest premia on sovereign bond issues of selected emerging market economies, 1997-1998

119

4.3.3 Bonds and loans arranged by the transition economies, 1997-1998

120

5.1.1 Investment and output of the Russian Federation oil and gas industry, 1990-1998

136

5.2.1 Financial structure of the Priobskoe PSA project

137

LIST OF CHARTS

Box

Page

1.1.1 Humanitarian aid for Russia

4

2.3.1 Goskomstat revision of Russian unemployment

68