Vice-Premier Zhukov speaks on Russian economic situation and outlook at London Forum

Russia's Deputy Prime Minister Alexander Zhukov believes that the transition stage will end in the Russian economy in the next four years. "We now have a window for a transition to a fundamentally new development stage, which can be completed in the next four or five years," the vice-premier said Monday at the 7th Russian Economic Forum in London.

"It is time the Russian economy stopped being a transition economy," he said. "I hope this tiresome adjective will disappear from references to Russia." In his words, the task of the new stage of the reforms is the modernisation of society, the state and the economy. For the state, it entails the reduction of the bodies of power, with the remaining agencies working harder, and maximally possible state aloofness of economic matters.

He reminded the forum participants that the number of federal ministries has been slashed from 23 to 14 and the staff of federal bodies of power has been reduced by 20%, while the salaries of officials have been increased by several times. Enterprises that are not connected with state functions will continue to be sold in Russia, Zhukov assured the audience. "We must also minimise the subject opinion of officials in decision making and in this way erect a major barrier to corruption," stressed the premier.

Talks on Russia's accession to the WTO have entered the final stage, said Zhukov. "They may be finished in 2004." But the time factor is not crucial; the main thing is to settle all disputed issues.

According to the vice-premier, in the past two years Russia has made serious progress at the WTO talks with the EU, though issues pertaining to gas and power engineering have not been settled yet. "The main problems of concern to Russia have been solved, but mutual claims have not yet been raised in the sphere of power engineering and gas," he said.

Investments in the Russian economy will grow to $140 billion by 2007. "Investments have grown from $56 billion in 2002 to $94 billion in 2004 and are expected to reach $140 billion by 2007," said the vice-premier. He is sure that direct foreign investments will grow, too, thanks to the vast scale of the Russian market and its unlimited raw materials potential.

The stabilisation fund will be set up within two years. "If prices of Urals oil remain at $27-30 per barrel, a stabilisation fund of 500 million roubles [1 dollar is approximately 28.5 roubles] will be created by the end of 2005, and the creation of the fund as we devised it will be completed within two years." He recalled that it had been planned that the 500 billion roubles will be accumulated in the fund within three years.

"In the next 4-5 years, the number of Russians who live below the poverty line will be halved." At present, over 20% of the population (about 30 million) have an income that is lower than the subsistence wage. By 2007, the government expects to raise the real take-home incomes of the population to grow by 35-40% on 2002, said Zhukov.

He pointed out that the government and the Central Bank of Russia intend to restrain the excessive strengthening of the rouble. The rouble will grow by 7% with regard to the currency basket and by 8% with regard to the dollar. "In 2005, the rouble/dollar rate will grow by 2% more." Inflation growth has been slowing down in the past four years. This year, prices will not grow above 10% and inflation is to be reduced to 4-6% by 2007. The reduction of inflation should help limit the growth of prices of the services of natural monopolies, whose contribution to inflation should not exceed 2-3%.

In 2005, electricity and railway transportation tariffs should not exceed the overall inflation level and gas prices will not be allowed to grow by more than 20%.

The tax reform will end in 2005-2006. "The unified social tax and the value added tax will be reduced" but this will not reduce budgetary revenues. "In the past years, the reduction of the tax burden did hinder the growth of budgetary revenues," said the vice-premier. "The reduction of taxes will give a new impetus to the market economy and will eventually result in the growth of budgetary revenues." According to the government, budgetary losses from the reduction of the unified social tax in 2005 will be compensated by the legalisation of wages and an increase of the tax burden on the oil industry. "The structural redistribution of the tax burden will allow us to encourage economic diversification." The vice-premier explained that investments would be channelled into the processing industries.

Zhukov said the 2005 budget "will include a considerable part of end-result financing elements and in a few years it will be fully based on the task setting and end-result assessment." The redistribution of powers and budgetary functions between the federal, regional and local authorities will be completed in 20025-2006. This will ensure the transition of the state to a fundamentally new level of financing and fulfilling social obligations.

Replying to questions after the forum, Zhukov assured journalists that there would be no de-privatisation or re-nationalisation in Russia. "The Russian government will do its best to convince everyone that there would be no de-privatisation or re-nationalisation," said the vice-premier.

According to him, the "Khodorkovsky case" did not seriously affect the Russian economy. "There was a minor fall on the Russian market, but this is not a reason to predict de-privatisation or re-nationalisation," he said. "I think the investors can see this."

(Former Yukos CEO Mikhail Khodorkovsky is in custody on charges of creating a criminal group that used fraudulent schemes during the privatisation of Russian enterprises.)