Moscow, 14 January 1998 (RFE/RL) -- President Boris Yeltsin has ordered the government to ensure that 1998 is the first year Russia records solid economic growth, but his Finance Minister has cast doubt on such prospects.
After meeting with First Deputy Boris Nemtsov at a holiday retreat in northwestern Russia yesterday, Yeltsin issued a statement saying he was instructing the government take steps to ensure Russia achieves two to four percent growth in 1998.
Yeltsin called for the government to push through a new tax code this year and reduce tax rates to stimulate the economy. He also urged the government to take steps to bring down interest rates in order to allow private sector lending to get off the ground.
But Finance Minister Mikhail Zadornov said in an interview published yesterday that he doubts whether the country can achieve economic growth in 1998.
Zadornov told the Russian daily Nezavisimaya Gazeta: "To be honest, I am not a big optimist about economic growth in 1998....I think the (1998) parameters will roughly follow figures for 1997."
Zadornov's comments put him at odds with the rest of the government. Prime Minister Viktor Chernomyrdin told a cabinet meeting last week that promising year-end economic results mean that Russia is well-placed to achieve growth this year. And First Deputy Prime Minister Anatoly Chubais has said that 2 percent growth in 1998 is realistic.
According to preliminary figures, Russia's gross domestic product was up a modest 0.4 percent in 1997, the first time the country recorded economic growth since the collapse of the Soviet Union.
But Zadornov said the recent market crisis had thrown a wrench into the government's economic plans. As he put it: "The market crisis of October-November has thrown Russia back at least half a year."
The Finance Minister said it would take at least three months to bring down interest rates.
The global financial crisis which began last October has hit Russia hard, as foreign investors fled both the country's debt and equity markets. Yields on treasury bills jumped to 45 percent in November, before coming down to roughly 32 percent currently. But yields are still well above pre-crisis levels of 17 percent.
Central Bank chair Sergei Dubinin told deputies at the State Duma yesterday that foreign investors withdrew $8 billion from the debt and equity markets during the last few months of 1997. He said the Central Bank's hard currency and gold reserves stood at $18 billion as of January 1, 1998, unchanged from December 1. In September, reserves stood at $25 billion.
As Dubinin put it: "Foreign investors have now calmed down, and money is practically not being taken out of Russia." But he admitted that foreigners were by and large still staying away from the Russian market, which was keeping T-bill yields high.
The market crisis has jacked up the government's cost of borrowing, putting a squeeze on the federal budget.
Zadornov said the government would not resort to borrowing to cover budget holes as long as yields on treasury bills remain at current levels. He said the Finance Ministry will continue to only place enough treasury bills on the market every week to retire old debt.
Zadornov said the first quarter of 1998 will be difficult for the budget due to the high cost of borrowing on domestic markets and an expected drop in tax collection rates in January and February.
Russia has been struggling to boost tax collection rates, which have been dismally low all year.
Zadornov said his ministry would press ahead with tax reform and submit a revised tax code to the Duma by the end of January, taking into account proposals from deputies. In his words: "We are think that, together with the State Duma, we will succeed in finalizing the draft tax code and passing its basic parts in the first half of the year."
With Duma elections scheduled for 1999 and a presidential election slated for 2000, observers have noted that 1998 is the last year the government can hope to push through tax reform.