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INTERVIEW-Russia must change policies for growth -key adviser
By Darya Korsunskaya

MOSCOW, April 4 (Reuters) - The Russian government must overhaul its economic strategy if it is to meet ambitious growth targets, presidential economic adviser Andrei Illarionov said on Friday.

Prime Minister Mikhail Kasyanov has repeatedly admonished ministers over slowing economic expansion and set growth targets of seven to eight percent a year by 2007-2008.

The very public scoldings have prompted the Ministry for Economic Development and Trade to draw up a plan setting an economic growth target of six to eight percent from 2007-2008.

But Illarionov said such growth rates were unrealistic if the government continued to raise costs.

"This is a programme to increase costs for the national economy," he told Reuters in an interview.

"According to this strategy, we are to increase the size of the monopolies, namely through price hikes. The economy's costs will increase due to further real rouble appreciation."

He added: "The document also says the economy must diversify by redistributing resources from profitable sectors into unprofitable ones, which would also lead to higher costs for the Russian economy."

Russia's key monopolies include gas giant Gazprom, power utility UES, and railways.

The economy ministry's programme says gas prices will rise 25 percent next year, with electricity climbing 15 percent and railway transportation 12 percent. The real rouble rate is expected to appreciate by five to eight percent a year.

Russia's gross domestic product growth was 4.3 percent in 2002. This year the government hopes for 4.5 percent growth.


The government has floated the idea of taxing the oil sector more and channelling funds to the processing sector. The Finance Ministry plans to raise tax on oil and gas extraction in 2004.

But Illarionov said the strategy was misguided.

"Competitiveness of the processing sector will not go up because of funds shifting between industries. Costs will not diminish," he said. "(The processing industry) are being given alms and this corrupts them."

Russia should instead boost oil output and exports, he said.

"If the oil sector produces most profit, we should not curb oil exports, but help it as much as we can. For instance, we should help develop the infrastructure."

He added the processing industry should be nurtured with a lower rouble and ensuing lower costs.

Illarionov added that the government should give the private sector more opportunities to borrow, instead of flooding the local market with its own paper.

"An increase of government borrowing on the domestic market reduces potential growth rates of the national economy," he said, adding the government should also cut foreign borrowing.

"Paying back the main part of our debt by refinancing it and keeping its absolute volume is not rational."

The Finance Ministry plans to actively refinance the debt from next year and replace expensive debt with cheaper borrowing. The government plans to issue $3 billion worth of Eurobonds in 2004 and $4 billion in 2005.

On the local market, the government wants to attract 260 billion roubles ($8.31 billion) in 2004.

Illarionov said the only way to achieve high and sustainable growth was to slash government spending.

"To provide for decent economic growth rates of seven to eight percent a year it is necessary to cut government (spending) to 19-23 percent a year," he said.

Government spending rose to 36.5 percent of GDP in 2002 from 33.8 percent in 2000. Next year the government hopes to cut its spending by 0.2 percent.

Illarionov also said the government must cut taxes, bringing payroll tax down to 20 percent from the current 35.6 percent.

The Finance Ministry suggests decreasing the lower grade of the regressive scale from 2005. ($1-31.2818 Rouble)

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