Aeroflot reported that it carried 4 mn passengers in the first eleven months of 1998, or 2% more passengers than in all of 1997. The increase in passenger traffic was a result of: a significant rise in the number of flights in 11mo98 versus 11mo97, both internationally and domestically the company's fixing domestic tickets in roubles (prices were previously linked to the dollar) and providing discounts for
international destinations (a discount of 30% for business class in one promotion) Aeroflot's large gains in market share at the expense of beleaguered domestic carriers. The higher passenger traffic will not boost financial results in the near term, as Aeroflot's load factor has declined due to the opening of new routes and an increased frequency of flights. Aeroflot's new expansion strategy had been imperfectly timed given the crisis in Russia, and any positive contribution from the new routes will take some time to emerge. We believe that the total number of passengers carried by Aeroflot for the whole of 1998 will be lower than our expectations of 4.45 mn. Aeroflot has, however, outperformed a sector that has seen a decline in total air traffic of 15% y-o-y.
The performance of Aeroflot should also be seen in the context of the continued troubles at Transaero. The launch of
Transaero's route to London, despite fares of $290 return, has led to very low load factors, as few as 80 passengers in some cases. This disappointing performance comes on the back of a number of cancelled routes to Europe, poor yields on the route to Los Angeles, returned aircraft and poorly performing domestic routes.
The previous draft budget allocated 2.6 percent of GDP to the Defense Ministry, while Defense Minister Igor Sergeyev said the army could not function on less than 3.5 percent of GDP. Sergeyev said the government agreed Wednesday to finance the armed forces at 3.1 percent of GDP. The tax package was approved after heated disputes between Boos and Finance Minister Mikhail Zadornov and despite indirect warnings from the IMF, which is still considering whether to resume lending to the government. Boos said Wednesday that the fund's managing director Michel Camdessus may be rethinking his opposition to the measures following his visit to Moscow last week. "[Camdessus and I] met for about one hour, and he is not unshakable in his belief that taxes must not be lowered," Boos said. "On the contrary, he believes it is necessary. He said he would be revising his position." But experts said the planned sales taxes will not compensate for the VAT reductions. "A lot of goods produced in Russia are then sold in the shadow economy, which cannot be taxed at all," said Yelena Panova of the Russian-European Center for Economic Policy. The Finance Ministry, meanwhile, insists next year's inflation will be 30 percent, the average exchange rate to the dollar will not exceed 21.5 rubles, while the Central Bank will have to print a total of 32.6 billion rubles ($1.6 billion), up from the previous estimates of 31.8 billion rubles. Analysts have said the forecasts are overly optimistic. "Other countries that have had financial crises have suffered much larger slumps of GDP, and I don't see how Russia could manage to keep the decline at 3 percent next year," said Rudiger Ahrend of the RECEP. The latest version of the 1999 draft federal budget has revenues of 473.8 billion rubles, expenditures of 571.1 billion rubles, and a deficit of 101.3 billion rubles, or 2.5 percent of gross domestic product, said Siluanov of the Finance Ministry. The ministry's previous draft had revenues of 482.91 billion rubles, expenditure of 587.39 billion rubles and a deficit of 104.47 billion, or 2.75 percent of GDP. GDP itself will total 4 trillion rubles, having shrunk by 3 percent on the year-to-year basis by the end of 1999.