#3 
The Russia Journal 
October 12-18, 2001 
Still cause for optimism 
By OTTO LATSIS

It’s clear now that economic growth in Russia is slowing down. In 2000, GDP growth was 8.9 percent – a result that would be good for the most dynamically developing country, but that, for Russia, was its best result in the last 30 or even 40 years. Looking at the results of the last eight months, the government is now expecting growth of 5.5 percent this year, while the Central Bank hopes for 6 percent. The government’s 2002 budget calculations are based on a growth forecast of two to three percent.

Though the pace of growth is slowing, the government is nonetheless full of optimism. Strange though it may seem under the circumstances, there are a fair number of reasons for speaking of economic success.

First, the very fact that the economy is still growing, even if more slowly, is a success in itself. Over the decade until 1999, after all, production dropped sharply, in some years tumbling very significantly. Government forecasts used as the basis for budget calculations for this year put growth at only four percent, while even such highly qualified economists as presidential advisor Andrei Illarionov feared zero growth this year.

There were reasons for these forecasts. Economic growth had slowed down considerably by the end of 2000, and at the beginning of this year was at zero or close to zero. The unexpected turnaround came only in April. The upturn in growth was so vigorous in April that observers were reluctant to believe the statistics. They said that the upturn would be short-lived. But the growth proved hardier than was first thought and persisted over the following months. Now it is clear that April’s results were not just chance.

Illarionov also has two main explanations for what lies behind this economic boost. First, state spending has decreased, which, following liberal economic theory, always speeds up economic growth. The Finance Ministry says that it is keeping all its budget commitments, and has only brought more order to budget affairs.

What this means in practice is that recipients of budget money are being asked to submit reports to the treasury, showing how they spent the money. There are no punishments involved, just a request for information. But this simple measure was enough to visibly reduce the number of demands for state money.

Recipients of budget money are not spending the full amount they are entitled to. This indicates that many requests for financing were drawn up with a wide margin, and the leftovers were being spent on things that they were not intended for.

At the same time, the treasury has also stopped taking back the leftover money at the end of the year. This unused money now remains on recipients’ accounts. This puts an end to the practice dating from Soviet years, whereby recipients would rush to spend their budget money – even if completely ineffectively – before the fiscal year ended.

Illarionov says the second reason for success is that the "Dutch disease" – an economic ailment affecting countries with large raw-materials exports and excessive foreign-currency earnings – has loosened its grip on the Russian economy. If too many dollars flow into the economy, the dollar begins to lose value while the local currency strengthens. This worsens conditions for non-raw-materials sectors, both export and domestic, because imports become cheaper and push local goods out of the market, while exports become more expensive and less competitive on markets abroad.

At the beginning of 2001, however, after a brief debate among Russia’s ruling elite, the country decided to meet all its foreign-debt commitments and bring borrowing down to an absolute minimum. This in turn reduced the dollar supply on the Russian currency market and put a brake on the ruble’s strengthening.

But the whole problem is that though the economic situation is unexpectedly favorable with high oil prices and high currency earnings, the growth rate is lower than in 2000 and will most likely continue to fall. The kick-start that the 1998 financial meltdown and high oil prices gave the economy is now fading inexorably.

The six percent growth forecast for this year would be a perfectly respectable result in countries with stable economies and high living standards. But in Russia, GDP today is only about half of what it was in 1990 and people’s real incomes are 10-15 percent lower than they were in 1998, when they were very low as it was. Meanwhile, prices for food are in many cases just as high as in countries where wages are several times higher.

Until now, people have been able to offset this to some extent with cheap rates for utilities, housing, transportation and gasoline – all two to three times lower than world prices. But as housing and utilities reform gets under way, these prices will inevitably rise.

The rapid economic growth of the last two years and the jobs it has created have so far smoothed over this rise in prices, and real incomes have even risen over this period. But if this growth comes to a halt or slows down too noticeably, social tension will become more acute. Russia needs high growth rates like those of 2000 for more than one year. It needs this kind of growth for at least 10-15 years. But the government hasn’t yet proposed programs that would ensure these results.