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RIA Novosti
November 12, 2004
WHY RUSSIAN OFFICIALS WELCOME AN ECONOMIC SLOWDOWN

MOSCOW, (RIA Novosti political commentator Yana Yurova) - For the past three years, the Russian economy has been continuously growing. In early 2004, experts hoped that by the end of the year Russia's GDP would grow at the almost customary 7.5%. However, their critics reminded them that everything that rises must eventually fall. According to recent headlines, Russia is nearing this point.

The State Statistics Committee released a report that in September Russia's GDP only increased by 3.5% as compared to last September and that the GDP growth rate fell 2.5% from August. However, the situation is not so dire, as industrial output increased 6.5% since the beginning of the year.

On the face of it, these statistics are not terrifying, as business activity in the industrial sector normally declines at the end of the year.

First, the backbone of Russian industry, the natural resources sector, traditionally slows down at the end of the year because of winter frosts. Sea routes freeze over and transporting oil becomes difficult in Russia. Consequently, resources are partially conserved, and the drop in oil production leads to slower growth of the export-oriented economy.

Second, the Russian financial sector went through a nervous period this summer. And after the banking crisis, bankers made the terms of loans more stringent and increased reserves. Interest rates on loans soared, and as a result, the number of people willing to borrow money in these conditions drastically decreased. Investments also fell. Russia is currently reaping the fruits of the summer's economic woes.

However, these are all seasonal and fixable changes. Banks have already recovered. According to experts, by early November bank account balances had reached a record high of 300 billion rubles, and interest rates were approaching yearly lows. Interest rates drastically decreased on the world markets and Russian bankers attracted about $3 billion in September from that. Therefore, business and industrial output are expected to increase in early 2005.

Interestingly, Russian officials continue to hold to their pessimistic forecasts. The Economic Development and Trade Ministry said that the GDP was not expected to grow more than 6.9% by the end of 2004. Is 6.9% a problem? Ask any European country dreaming of a 4% growth rate.

Furthermore, when speaking at an international conference in Hong Kong, presidential economic adviser Andrei Illarionov said Russia's economic policy for the past two years was wrong. Allegedly, Russia's policy suppresses industrial production and deprives Russia of economic freedom. According to him, the main obstacle to economic freedom is state expenditures, which he thinks are too high in Russia.

I would like to address this aspect of Illarionov's argument, which is likely the source of other officials' pessimistic economic forecasts. The State Duma is now considering a draft of the 2005 budget. The debates are becoming increasingly heated, as the draft law will soon be considered in the third and final reading. Most likely, it is time to curb the parliamentarians. But how? A universal propaganda trick could be useful: the deputies likely to increase state spending should be threatened with an economic recession and impossibility of fulfilling the will of the Russian president, i.e., doubling the GDP in ten years. Considering that most Duma deputies are loyal to the president, it is likely that they will realize the significance of the situation and reduce their appetites for state spending. It would not be harmful to Russia to mislead the country for a month or so in order to maintain a high level of economic growth. This will keep spending in check and help continue economic reforms.

Unfortunately, the pessimistic forecasts have already reached other countries. The European Bank for Reconstruction and Development's annual report contains information about Russia's economic slowdown. The report includes figures that correspond to the parameters cited by the Russian officials...