#16 - JRL 8082 - JRL Home
TITLE: PRESS CONFERENCE WITH GERMAN GREF, MINISTER OF ECONOMIC DEVELOPMENT AND TRADE
[MEDT, 17:30, FEBRUARY 18, 2004]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)

Moderator: Good evening. The Collegium has just finished its discussion of the social and economic results of the development of the Russian Federation. We welcome you to the press conference by Minister of Economic Development and Trade German Gref. Also taking part are First Deputy Minister Mikhail Dmitriyev, Deputy Minister Arkady Dvorkovich and head of a department Gennady Kuranov. After an introduction by German Oskarovich I will open it up for questions and please address your questions and introduce yourselves.

Gref: Good day, colleagues. Today we held our scheduled meeting of the Collegium to approve materials submitted by the government, materials assessing the results of social and economic development of the previous year. We had quite an interesting discussion today involving our colleagues from other ministries -- the Ministry of Finance, the Customs Committee, Goskomstat, the Ministry of Industry -- and some independent experts. And I must say that the main assessments of the officials and of the independent experts coincide on many points. Let us say, they coincide on all the basic points.

And today we identified some elements on which additional statistics and studies are needed, an investigation into some aspects of our export and import operations and the balance of payments so as to get that information within days and submit to the government a complete report. I am not going to recap the key figures. You know them all. Hopefully, we have already got the final figure for GDP growth (7.3 percent). Industrial output has increased by 7 percent, the average annual rate of growth of the Russian economy is 1.5-2 times higher than in the developed economies of the world. We have a slide comparing the rate of growth of different countries and the only country that has registered a growth rate higher than Russia's is China which grew by 9 percent in 2003.

In general, we can state that on all the key indicators such as the growth of the cash incomes of the population (about 13 percent), trade turnover (30 percent), the purchasing power (more than 10 percent), the purchasing power of pensions (which exceeded the pensioners' living minimum by about 2.5 percent). For the first time in recent years the growth of labor productivity in industry exceeded the average monthly growth of wages. Also, for the first time we have managed to keep inflation within the forecast limits, partly due to the strong exchange rate of the ruble. One has to admit that the strengthening of the ruble has helped us to match the inflation target. The inflow of foreign investment has increased, the export of private capital by residents has dropped to a record low of 3.9 billion dollars, and Russia has become a much more attractive destination for investment. As you know, major international rating agencies have recognized that fact.

The question arises, how does one account for this pretty picture. That topic was also discussed. Of course, the result can be attributed to many factors and according to our specialists, the contribution of favorable prices to the GDP growth rate amounted to 2 percent (1.9 percent). So, if the external prices were not as favorable, the growth would have amounted to 5.4 percent and not 7.3 percent. Specialists from independent research institutes have addressed the meeting and in their opinion that contribution is even less. For example, according to the Development Center, if the oil and gas prices stayed at the 2002 level, we would have had a growth of 6.8 percent. The spread of expert assessments from 5-5.5 percent to 6.8 percent. This is the real growth number that excludes the price factor. Without a doubt, a positive contribution -- (audio break) -- to the stability of the economic parameters, including the stability of the rate of the ruble -- (audio break) -- It is also the favorable impact of the stable and -- according to experts -- correct course of the government. Experts evaluate the weight of the factor at one and a half times.

In this way, doubtless, the basis is the investment activity of the enterprises. Growth has clearly passed over into its investment stage. One can probably largely state that still we have passed over from the stage of restorative growth, extensive growth, which relied mainly on loading the existing capacities of the enterprises into the stage of investment growth. But we cannot yet assess today the tendencies, the growth of increased lending to the real sector.

Without a doubt, statistically -- there is a very serious growth of this lending. In principle, the banking credit has seriously grown in the course of 2003, but still it constitutes...

Dvorkovich: 27 percent.

Gref: 27 percent. Nevertheless, regrettably, it represents a figure not sufficient to permit us to speak about some sufficient scale and volume of increasing resources. Statistically, a very big and significant figure is connected with the parameter that we have yet to analyze. These are, among others, credits of higher organizations, i.e. intraholding lending. It is very important to separate the two integral components within this parameter: it is attracting through parent companies -- the lending resources and, strictly speaking, the concentration of depreciation deductions of profits within the framework of head companies with their subsequent distribution between the daughter enterprises.

But in principle, if one talks about the statistic values, about the main reasons, this factor has also grown very seriously.

Well probably I have covered all the main points. And then we will communicate with you in a mode of dialogue. There may be some questions. I can only say that such a favorable picture should not cause anybody to feel relaxed. Our economy remains very vulnerable in the face of possible fluctuations on the external markets. As to all the tasks related to the reform of the economy, enhancing the effectiveness of the social sphere, reducing the tax burden -- these remain not simply topical but super topical. If we don't do these things, then regrettably I fear that in the event of an unfavorable development of the situation, we will be discussing with you quite different sets of figures.

This is about it. Colleagues, are there any questions that you wish to pose to me?

Q: Interfax agency. German Oskarovich, the first question is to set the record straight. You spoke about high prices of oil in a favorable market situation -- (inaudible) -- a total of 2 percent. But if you compare these 2 percentage points, you compare it with what oil price? Is the price 27? And if it is 2 percent, then of what price? And then as a follow-up. Early last year you made a forecast and it was 4.5 a year. But as a result, the figure is 7.3. That means that we failed to incorporate the prices and we failed to accommodate something else. So what is it that they have failed to forecast early last year? And the second question: are the GDP figures available for January and is there an appropriate forecast for this year? Thank you.

Gref: The first question was about the price, wasn't it? So, you would like to have the comparison. We make a comparison with oil price at the level of 18.5 dollars per barrel. Why do we proceed from such a price? It is because this is average price that has settled over the past 30 years. And what next? -- (audio break) -- As to investments, they are developing at a much faster pace -- And there are data for January. As compared with December 2003, the growth was 2 percent. In January 2003, GDP growth was 7.8 percent...

Q: Could you give us the forecast for the year?

Gref: Colleagues, the annual forecast is done in January and so when we take the official implementation figures and adjust them, we will surely make them known to you.

Q: (Inaudible).

Gref: The expert assessments are all known to you. Arkady Vladimirovich has already said that all assumptions are possible depending on how the market situation shapes up.

Q: Strana.Ru. German Oskarovich, if you allow, the first question is to Arkady Vladimirovich and the second is for you. Arkady Vladimirovich, just now your direct head said that it has been possible to operate within the inflation parameters thanks to the policy of the rate of the ruble. Tell us, please, whether your ministry has already conducted a factor analysis of inflation for last year and could give us the picture as to which factors influenced inflation the most? And if it is possible, do that in percentages. But I don't know how you conducted your analysis. The second question is for German Oskarovich. There were reports in printed media that a compromise was reached between the Ministry for Economic Development and Trade and the Finance Ministry concerning a reduction in the rate of the single social tax and concerning the introduction of VAT accounts with a simultaneous 15 percent reduction in the VAT rate. Could you confirm or disprove this information? Thank you.

Dvorkovich: Now concerning inflation. We in the Ministry carried out an analysis and in any country the inflation results from the impact of two basic factors. The first is the basic inflation that is molded by demand and the money supply, that is the supply to demand ratio and structural inflation that is basically a one-time change in prices, that is price change due to various short- lived factors rather than the overall trend in the market.

As for the first factor, base inflation, it remained stable last year and by the end of the year was about 10 percent while the money mass had increased by almost 50 percent. There are two reasons for that. The first, and the most important, reason is that demand for rubles was growing. People reoriented to ruble-denominated assets, they began to save in rubles and invest their ruble- denominated assets in real estate. Demand for real estate grew considerably.

The development of the market itself creates stability for the growth of demand. The growth of the market, including the real estate market, managed to absorb excessive money supply.

The second factor is the strengthening of the market. It is also an important factor even though it alone cannot reduce inflation. As First Deputy Finance Minister Alexei Ulyukayev said today the budget stabilization was a serious factor. Financial reserves that were accumulated and that are now being transferred to the stabilization fund are a major means of fighting inflation.

The second structural parameter is the growth of prices and tariffs for the products and services of natural monopolies. This factor accounted for about 4 percent of inflation. However only the amount that was above the base inflation may be considered direct contribution to structural inflation. And that is no more than 2 percentage points.

As it was said at the government meeting today by independent experts, we have learned to control the prices and tariffs of natural monopolies and know how much they contribute to inflation. One of the chief tasks now is to try to understand what impact it has on base inflation and how to control this parameter. However, we have all the instruments we need this year to solve this question, including the stabilization fund, the monetary and credit policy, and instruments connected with the expansion of the markets I mentioned above: housing mortgage, financial markets, the pension system, etc.

Gref: (Inaudible)...

Dvorkovich: (Inaudible)...

Gref: Exclusively due to the dynamics of the exchange rate policy. It was one of the factors that helped us achieve the goal. And of course all three components (inaudible)... Thank God, we succeeded in coordinating them.

As for (inaudible)... I would not like to talk about this in detail. I can only say we have achieved a high degree of coordination with the Finance Ministry. But the details have yet to be discussed and calculations to be checked and rechecked. And this is exactly what we are doing very actively right now, every day, for many hours every day.

After all details have been worked out, we will answer all your questions, make all comments and tell you everything. But at this point (inaudible)...

As for the (inaudible)... accounts, the position of our ministry has not changed. We think that it's not a very good idea. However, we agree that if such a decision is adopted, it must be adopted only if the base rate is reduced because business should receive appropriate compensation for the growth of administrative expenses (inaudible)... who were engaged in this criminal business. Therefore, (inaudible)... A serious reduction of pressure.

Q: You said you did not want to go into details. However news agencies have carried your statement (inaudible)... Could you elaborate please?

Gref: I'd rather not comment on the proposals that are still being prepared. Indeed, one of them envisages a rather serious reduction of the (inaudible) rate connected with these decisions, including administrative decisions to refer 4 percent of payments to the payroll fund (inaudible)... to the cumulative pension savings.

(Inaudible)...compensatory measures such as a bigger income tax rate and mandatory increase in the payroll fund. Such mechanisms are being elaborated. Early versions of calculations have been completed and a detailed and careful discussion is taking place of all the pluses and minuses, the impact on all the sectors of the economy, on the economy as a whole, on the budgetary situation. We want to understand in every detail how it will work out in practice. So, I would urge you not to treat it as some kind of sensation. I repeat, we are talking about the reduction of the tax burden, about insurance payments, that's in the second part, we are talking about a package of interesting proposals to broaden the rights of citizens in disposing of the money contributed as insurance premiums. We will discuss all this with you and put you in the picture as soon as corresponding decisions are taken.

Dmitriyev: I would just like to add one remark. We are looking at different possible configurations of the rate of the single social contribution, insurance contributions to the Pension Fund. But in terms of the aggregate consequences for taxpayers these variants are expected to yield similar effects. That is, a reduction of the effective rate of the single social tax and insurance contributions, that is, the aggregate load on the wage fund by 4.5-5 percent. This is the spread. According to our calculations, in 2005 the aggregate effective load is 29.2 percentage points. That is, it will go down to about a little over 24 percent.

Gref: And all the innovations proposed are aimed at stimulating the employers to legalize the wages they pay to their employees. Naturally, this would substantially increase the level of social protection of the employees and encourage employers to raise the official wages. This is the aim of all these proposals. This is one of the key tasks.

Q: The report of the World Bank says that about 25 percent of the Russian GDP depends directly on the oil and gas sector. That's about twice the number given by Goskomstat. Can you comment on this and what is the Ministry's assessment of the contribution of the oil and gas sector to the GDP growth?

Gref: Unfortunately, none of us have seen that report.

Dvorkovich: Just a brief comment. The share is not more than 15 percent.

Gref: In order to comment, one has to know what numbers are being discussed and we would rather not comment at this point.

Drovkovich: By way of a comment, this can be in a situation of growth, otherwise it is not more than 15 percent.

Gref: In order to comment, one has to understand what figures are at issue.

Q: My question is for Arkady Vladimirovich. Could you please comment that task of doubling GDP by which you were not quite delighted but what is your attitude to the task today? Will it be accomplished? And the main thing, in what capacity -- will it be nominal in doubling, but will anything change?

Dvorkovich: I can only quote the words of Yevgeny Nikolayevich Rodionov that the doubling of GDP is in reality a doubling of consumption, a doubling of services rendered to the population, i.e. a doubling of the quality of life. It is very good, I think, because it will really change the situation.

Gref: And there is another beautiful girl who wishes to ask a question.

Q: (Inaudible) -- journalists.

Gref: I beg your pardon, what journalists?

Q: Ukrainian journalists would like to ask you to say just a few words about the development of economic relations.

Gref: That's a good question. You see, the only thing we expect from cooperation with Ukraine is a greater degree of harmonization of our joint activities and a higher level of execution of the agreements that have been reached. This is to say that if we talk about interstate projects. But if we talk about the global positions, one would like to believe that the agreement on a single economic space will be implemented, including by Ukraine, in its full volume. This is probably the biggest thing that we can do for our countries and for the business of our countries in order to be able to effectively develop within our foreseeable economic future.

As regards the current indicators, in principle we have positive dynamic after last year's shock in connection with the VAT. One can consider that the economic rent has adapted in the new situation of the market, now a normal restoration process is in progress, trade is growing and cooperative activities. In this respect, based on formal and informal indicators, the situation is getting more and more normalized.

As regards the coordinated nature of our joint activities, these are activities in all directions. Of course, we would like to see a much higher level of coordination -- (inaudible) -- I hope that as soon as the first period of adaptation occurs, we will get together to discuss a number of problems in our trade and economic relations.

Moderator: Thank you.