#15 - JRL 7219
June 10, 2003
Oligarchs To Double Russian GDP
Russia's machine-building industry is predicted to grow by 26 percent
It is an open secret that the current economic growth in Russia is made possible by high world oil prices. However, the USA has gained control over Iraqi crude, and no one doubts that prices will soon lower. Probably, the same will thing happen to Russian economic growth. Yet, the Russian government has a goal to double GDP by 2010. Today, the government discussed a complex of measures for support of the domestic machine-building industry.
Real economic growth may happen with the development of processing industries. Oil and gas exports will definitely remain a lucrative business, but one has to achieve a seven or eight percent growth rate a year to double GDP by 2010. The Russian fuel and energy complex is unable to achieve such progress. This is why only the machine-building industry that can retrieve superpower status for Russia. During today's discussion at the government, it was pointed out that the domestic machine-building industry currently finds itself in difficult circumstances. The industrial output of the industry dropped from 24.2 percent in 1990 to 18 percent in 2002. Sixty-five percent of the industry's equipment is outdated, and enterprises have huge debts, which total 566.4 billion rubles. The most important indexes of the industry do not look good either: profitability dropped from 17 percent in 2001 to 12.5 percent in 2002, and the share of unprofitable enterprises increased from 23.1 percent in 2000 to 40.9 percent in 2002. If current trends continue, nothing will be left of the Russian machine-building industry in some 10 or 20 years. Yet, the machine-building industry is up to 50 percent of the industrial output of foreign developed countries. This allows for a complete renewal of industrial equipment every seven to ten years.
Nevertheless, in connection with the objective to double GDP by 2010, Russian machine-building is supposed to grow by 26-30 percent. According to the complex of measures, machine-building enterprises (and processing industries) will have to write off accounts payable (or to delay payment until 2010, having written off a part of the debt), to retrieve investment privileges with respect to income tax and preserve customs barriers for the import of cars and equipment.
Officials at the Science and Industry Ministry believe that the state should to subsidize interest on bank loans that exporters of turbines or electric power station equipment take out. Machine-building exports from Russia are supposed to increase by 50 or 55 percent by 2010. Industry enterprises currently are suffering from a serious lack of personnel; therefore, officials say that the educational system should be supported in order to train professional engineers.
Indeed, a lot of experts believe brining back reduced taxation of income would assist in the growth of investments. Specialists have already calculated that such a measure would increase the investment resources of processing enterprises by 23-24 percent. Yet, Prime Minister Mikhail Kasyanov found nothing new in all these measures. The government has been discussing this problem for a long time already. Certain parts of the proposed solution have already been put into practice, but no effect has been seen. However, this does not mean that the ministerial suggestions are bad.
Moreover, the idea to bring back investment benefits does not fit Finance Ministry's plans for fiscal reform: plans have already been approved by the government and sent to the State Duma. The Finance Ministry says that the value-added tax would be reduced for processing industries from 20 to 18 percent. More importantly, these measures will not be supported with serious investments. However, Mikhail Kasyanov has reportedly found the money for investments: excess profits of Russian oil companies. Finance Minister Aleksey Kudrin has recently suggested that excess profits be withdrawn from oil companies. The prime minister held Kudrin back at that time and calmed the oligarchs down. Now the oligarchs will have a choice: they will be offered an option to invest excess profits in the machine-building industry and buy equipment from domestic producers. Most likely, the government's new offer will be perceived constructively, since even extremely selfish Russian oligarchs know the difference between a forced confiscation and a voluntary contribution.