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Russia Profile
www.russiaprofile.org
January 19, 2005
COMMENT: Growth Potential Remains Strong
But Broad Reform Is a Tall Order
By German Gref
German Gref is Minister for Economic Development and Trade. He contributed this comment to Russia Profile.

The socio-political priorities for the Russian economy in 2005 are to continue on a course that will allow the country to double its GDP within 10 years, reform education and health services, modernise the army, improve living standards and reduce poverty through support for dynamic and stable economic growth, and increase Russia’s attractiveness to investors. These goals can only be reached against the backdrop of stable economic growth.

Economic progress largely depends on structural and institutional changes already underway that must be continued. The economy’s potential for growth remains high. The macroeconomic and financial stability that we have attained in recent years gives us grounds to believe in the prospects for success in 2005.

However, Russia is not moving towards a liberal economy as quickly as we might like. We are proceeding cautiously, moving on the basis of Russia’s own positive experience and that of other countries. The direction we must move in has been chosen, and President Vladimir Putin has outlined the country’s main priorities for the future.

The medium-term program for social and economic development that the Ministry of Economic Development and Trade drafted for 2005-2008 and submitted to the government in December, reflects the development strategies for individual industries proposed by relevant ministries. The program also lays out the indicators that will form the basis of budget planning, with a view to reducing poverty, doubling GDP, and increasing competitiveness. The program spotlights specific social factors.

In our estimate, the share of the population with an income below the subsistence minimum will fall to between 5.2 and 7 percent by 2015, compared to the figure of 17.3 for 2004. Likewise, the portion of the workforce in low-income sectors, where incomes hover at near the poverty level, will decrease. The number of people surviving on incomes below that of two times the subsistence level will drop to between 25 and 30 percent by 2015. The corresponding figure for 2004 was 50.6 percent. The achievement of this goal will, most of all, be facilitated by reforms in Russia’s agricultural sector, which will allow us to reduce poverty in rural areas.

The growth of real household incomes, a well as measures to support low-income sectors, will reduce the gulf between the rich and the poor. In 2004, the average income for the richest 10 percent of the Russian population was 14.8 times higher than the average for the poorest 10 percent. This gap should fall so that the former group’s average incomes will be 13.5 times that of the latter by 2015.

The ministry has determined the potential size of the country’s middle class, defining this as families where income is over six times the official subsistence wage for every member. Thus, the portion of the population that can be considered “middle class” will grow to 50 to 60 percent by 2010, against the current figure of 20 percent. The strengthening of the middle class will increase consumer demand and encourage the development of related industries.

Relying on the latest estimates available in December, we have reduced the official GDP growth forecast for 2005 to 5.8%. But we have not revised the official inflation forecast, which remains at 7.5–8.5 percent. We believe that we can no longer encourage growth by reducing the tax burden and dampening the strength of the ruble.

The ministry’s forecast stipulates three economic development scenarios leading up to 2015. The first, basic, scenario reflects current trends in the economy’s competitiveness and efficiency and does not include major new national projects or strategies. The second scenario is based on raw material exports and investment inflows. It provides for the implementation of several strategic projects in the oil and gas sector, transport infrastructure, and the field of hi-tech. The third, innovation-oriented, scenario entails structural changes oriented toward supporting the development of the hi-tech information sector and less dependence on the export of oil and gas and other raw materials. This scenario forms the basis for the government’s medium-range program.

The program includes forecasts of likely GDP figures based on world-oil-price dynamics. This figure is a vital factor for a Russia with an economy so dependent on the export of raw materials. With Urals-grade crude at $31 per barrel, estimated GDP growth for 2005 is in the range of 4.5 to 5.8 percent. With Urals selling at $33 per barrel, GDP should grow by from 4.8 to 6 percent, and with the price for Russian oil at $35 per barrel, growth will be in the 5 to 6.2-percent range. In the years immediately following 2005, the Russian economy will become less dependent on oil and the third, innovation-oriented, scenario projects growth rates exceeding 7 percent beginning in 2011, regardless of world oil prices.

Global economic growth in 2004 will be 4.9 percent and is expected to fall to 4.1 to 4.2 percent in 2007. A number of forecasts extend beyond the 2005 to 2008 period, for which our medium-term program has been elaborated, but many of the reforms and strategies that we have outlined will only yield results after 2010. The potential effect of the development strategies we are considering is estimated to add 1 to 1.5 percent to GDP growth between 2006 and 2010, and then 3 percent in the years 2010 to 2015.

Implementing measures planned for 2005-2008 will allow us to maintain high growth rates of the Russian economy (6.9 percent for 2004) and create the right conditions for more intensive long-term growth.