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Russia to restore GDP, industry by 2007 end, no oil price fears

Russia's finance minister said Friday the economy is in its best state for more than 15 years and will recover the gross domestic product and industrial positions lost after 1990 in 2007 even if oil prices fall.
MOSCOW, September 22 (RIA Novosti) - Russia's finance minister said Friday the economy is in its best state for more than 15 years and will recover the gross domestic product and industrial positions lost after 1990 in 2007 even if oil prices fall.

Alexei Kudrin also told members of the lower chamber of parliament, the State Duma, about plans to divide the country's petrodollar fund into two parts, and to tackle problems connected with the ruble's rapid appreciation and money supply growth. He suggested, though, that plans to raise the minimum wage could create major problems.

"We will recover all of the lost GDP and the country's industrial potential [to the level of 1990]," Kudrin said. "We will recover it, we will be increasing it."

High commodity prices have helped pull Russia out of the economic woes it experienced in the 1990s, and Kudrin said Russia's GDP growth in 2004-2007 would total nearly 29%.

"In those four years, the economy will have grown by 28.9% of GDP, including 6.6% in 2006 and 6% in 2007," he said.

Kudrin said that since the latest legislative election in December 2003, the country's GDP has been growing at an average rate of 6.5%, just shy of the 7% needed to accomplish the objective President Vladimir Putin set in 2003 of doubling GDP within a decade. Second quarter growth was strong at 7.4%, up 1.9 percentage points on the first quarter.

He also said that by 2007, investments in fixed capital would reach 4.32 billion rubles ($161million), double the amount invested in 2003, which he claimed would be a turning point in terms of industrial equipment renewal.

Oil windfall

In a generally upbeat address to parliament, the minister said the country would avoid a repeat of the 1998 economic crisis that subjected millions of ordinary people to misery regardless of global oil prices after repaying its debt to the Paris Club of creditor nations.

Russia fully repaid its $23.7 billion debt to the 19-nation Paris Club, which unites Europe's biggest economies, ahead of schedule on August 18-21.

Kudrin also said the Stabilization Fund, which was set up to accumulate windfall oil revenues in 2004 and stood at $64.7 billion as of September 1, would be divided it into two parts: a reserve fund, totaling 7-10% of the country's GDP, and a fund for future generations.

He said earlier in the month that his ministry would submit plans on the fund for future generations in October but told MPs today that the current level of the Stabilization Fund's 6.4% of GDP had not yet reached the base level to form the reserve fund.

With the treasury awash with petrodollars, Kudrin forecast that Russia's gold and currency reserves would total about $370 billion by the end of 2007, adding that they now stood at $259 billion. Russia has the world's fourth largest currency reserves after Japan, China and Taiwan.

The minister said more than a half of the 2006 Russian budget revenues came from oil sales, but said the figure of 52% "is only a temporary [source of] income, which fluctuates depending on high oil prices."

Even though oil has dropped from its July high of $78.40 per barrel of Brent crude to around the current price of $62, the minister said the 2007 draft budget would not be harmed if the price for Russia's main export blend, Urals, fell to $37 per barrel. The price of Urals brand on Mediterranean markets was $59.46 as of September 15, 2006.

"It means that a fall in the oil price to $37 per barrel will not harm us," Kudrin said.

Ruble appreciation

But Kudrin also issued a warning, saying although the ruble had strengthened to the level it reached before the country's financial crisis in 1998, and its further appreciation could present a critical threat to industry.

The finance minister said in August that the government would use economic measures to hold back the ruble's further rise, and intended to keep the national currency's appreciation within 4.7% of its average effective rate this year.

And Kudrin, who has held his post since Putin swept to power in 2000, told the Duma today, "The main problem with the strengthening of the ruble is inflation." The government aims to hit an inflation target of 8.5% this year, down from last year's figure of 10.9%.

The minister also said money supply was growing too rapidly.

"Comparing August with [the previous] August, money supply has grown by 44%. This is too fast a rate for money supply growth, with the relatively weak growth in the economy and industry," he said.

In the first eight months of 2006, Russia's monetary base gained 15.9%, and M2 money supply rose 19.6%. Russia's M2 is defined by the CBR as total cash in circulation outside banks, plus ruble funds on accounts of resident non-financial organizations and individuals.

According to the Central Bank, Russia's money supply grew 2% in July 2006 to 7.231 trillion rubles ($271.1 bln), and 6% in June.


Although the government aims to improve living standards for Russia's 142 million citizens - 14% of the economically active population live below the subsistence minimum according to Kudrin's ministry - the minister warned that proposals to raise the minimum wage to a subsistence level would leave entire branches indebted.

"If we set the minimum wage at the subsistence level minimum, we would indebt at once several branches [of Russia's economy]," he said.

The current minimum wage in Russia is some 1,100 rubles ($40), and the subsistence level wage is 4,000 rubles ($150), on average.

Kudrin said this would lead to wage arrears in agriculture and light industry. He also said the difference between subsistence level minimums in different Russian regions should also be taken into account.

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