APRIL 2001

GDP Down 1% in January but Ministry Predicts 5% Growth Every Year Till 2010

Gross domestic product shrank for the first time in two years in January, falling by 1 percent to 1.2 percent from December's level, the Economic Development and Trade Ministry said at the beginning of March  The fall was due to a decline of business activity after a sharp increase at the end of 2000, the ministry said in a monthly review of the nation's economy, published on its web site www.economy.gov.ru. "A spark in consumer and construction activity at the end of the year ...was followed by a natural fall in the first month of 2001," the ministry said.

However, the Ministry recently released its Strategy for Development until 2010, and foresees a rosy economic outlook and a metamorphosis into a consumer-based society.  However, analysts and economists say that these predictions are too optimistic and that many barriers still have to be overcome before Russia can complete such a transformation.  The strategy assumes that Russia will exhibit 5 percent growth in GDP every year until 2010.

This scenario might be achieved if the package of economic reforms passes the State Duma; if the Land Code is successfully implemented; if deregulation of the economy takes place; and if the government can create a stable tax environment to encourage businesses to transfer export earnings back into Russia instead of parking them in offshore accounts.

Back in August 1998, when Russia suffered her devastating financial crash, it seemed that the country stood on the edge of an abyss.  The predicted collapse of the economy did not occur , but in a surprising turnaround in events, thanks to tough financial disciplines exercised by the Government and the high price of Russian commodities, particularly oil, the country has experienced almost 3 years of growth.

Over the first 6 months of last year , Russia experienced her best economic performance for 30 years with GDP up by 7.5% while real wages grew 24% - albeit from a low starting point - GDP is still below that of 1989.

GDP Rises 7.7% for 2000

Although new economic data shows that the economy was weakening at the end of last year and at the beginning of this year, The nation's GDP rose 7.7 percent in 2000 after 3.5 percent in 1999.

The Russian economy remains highly vulnerable to swings in commodity prices.   

Putin's First Year In Office

Vladimir Putin's Administration has proved his commitment to reforms and has demonstrated his ability to implement them.  A simplification of the income tax system (flat rate 13%)  will be implemented for 2001 and will help raise the contribution from declared income.

Yegor Gaidar, the former Prime Minister, who launched Russia's market reforms in the 90's says "The essence of what needs to be done is to divide power and property....  That means a lot of very simple things: eliminating the special tax agreements between the state and big business, making the State more transparent, minimising the ability of state employees to interfere in the economy."

Mr Putin believes he can achieve this by strengthening the authority of the executive, which has been so badly eroded by the country's financial oligarchs and regional governors.

Russian economists caution that the country's health will depend on the restructuring of individual companies, whilst structural changes to the economy remain key to sustaining Russia's current boom.  It may be easier to implement tough measures when incomes are rising - but economic mismanagement is easy to ignore while the country is flush with cash.