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Friday, January 9, 1998 Published at 18:54 GMT

World: Analysis

Russian Economy - Green Shoots For 1998?
image: [ Viktor Chernomyrdin ]
Viktor Chernomyrdin

The Russian Prime Minister Viktor Chernomyrdin, summing up the economic results of 1997, announced that Russian Gross Domestic Product had grown by 0.4% last year, the first positive performance since the end of the Soviet Union. But the economy still faces enormous problems, such as poor rates of tax collection. Our regional analyst Tom de Waal attempts a diagnosis of the state of health of the Russian economy.

The Russian statistical service Goskomstat is notoriously unreliable in its figures. The performance of whole sectors of the economy, such as real estate and construction, is calculated on estimates. Nonetheless there is no doubt that the worst is over for the long-suffering Russian economy. A lot of investment went last year into the oil and gas sectors, which are the main source of Russia's wealth, and that has provided a much-needed financial and psychological boost for the country.

The famously cautious Russian Prime Minister Viktor Chernomyrdin allowed himself some optimism at a meeting of the full cabinet on Thursday:

"The most important result of last year was the appearance of the fundamental prerequisites needed for economic growth and the beginning of crucial work to conduct reform across the entire front. I consider it very important that we entered the New Year having liquidated our debts from the state budget for wages."

The cautious sense of optimism is shared by the International Monetary Fund, which yesterday approved a loan of $670m dollars to Russia, the lastest tranche in its three-year programme of payments. The IMF has three times suspended payments on the overall loan of $9.2bn.

The situation this New Year compares favourably to a year ago, when there were signs of real crisis in the economy. Wages to millions of workers and pensioners were going unpaid and a web of mutual indebtedness between companies threatened to strangle the economy. The appointment last March of the two 'young reformers' Anatoly Chubais and Boris Nemtsov to oversee the economy now seems to have turned the situation round.

Inflation for the year was 11%, far less than previous years, and the major reason why the government felt confident enough to launch new banknotes in 1998, with three zeroes cut from the rouble. The government inflation forecast for this year is a mere 7%. Almost all state debts to employees have been paid off.

The Russian stock market is one of the fastest-growing in the world. It grew by 76% over the year and coped well with the turmoil caused by crashing markets in the Far East. Moreover the government's growth figures almost certainly underestimate the role of the vast shadow economy. Many Russians, who are officially below the poverty line manage to survive by doing illicit work or trading in consumer goods.

The picture is not so attractive however when you consider that badly needed deep structural reforms to the economy threaten to make many Russians poorer before they get richer. The most pressing problem is the very low rate of tax revenues coming into the budget. A new draft of a much-needed new tax code, simplifying the Byzantine complexities of the system, is due to be sent the Communist-dominated Duma and opposition deputies may try to weaken and amend it.

Mr Nemtsov has barely started to implement a pledge to slash subsidies on household utilities, such as electricity and gas, which most Russians receive for almost nothing - a move which will cause much resentment. The next electoral cycle in Russia is only a year away and time is ticking away for the young reformers to carry through these painful reforms.

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