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Russia: Analyst Forecasts Problems For Russian Economy

Russian officials have given assurances that the economy will continue to grow following a January jump in inflation that surpassed their predictions. But they concede that growth has already stalled, prompting doubts about what they plan to do next.

Boston, 8 February 2002 (RFE/RL) -- Russian inflation is surging ahead of all forecasts, posing a rising risk for the country's economy this year.

On 5 February, the State Statistics Committee reported that the monthly increase in consumer prices reached 3.1 percent, the highest rate in nearly three years.

Over the past two weeks, various government ministries and officials offered inflation forecasts ranging from 2.3 to 2.7 percent. All the predictions turned out to be far too low.

For the time being, the Economic Development and Trade Ministry is standing by the assumptions for annual inflation in the government's 2002 budget.

After a cabinet meeting on 7 February, Deputy Economy Minister Arkadii Dvorkovich said, "The government is sticking to its forecast of 12 to 14 percent," the Reuters news agency reported.

Dvorkovich offered an optimistic view of the January figures, saying they were largely due to one-time factors like an increase in railway tariffs. Without those, the rate would have been 2.7 to 2.8 percent, he said. But even that level has only been seen twice in the previous 30 months, according to details from the Economist Intelligence Unit.

Prime Minister Mikhail Kasyanov, who frequently speaks in economic generalities, said, "We have no fear about the balance of payments. We have every reason to say that the economy will grow." Kasyanov added, "Macroeconomic stability is the firm platform, which allows us to move further and make it possible to carry out reforms."

Despite the assurances, a recent World Bank survey of economists put the annual inflation figure in the range of 15.4 to 18.5 percent, depending on the price of oil.

Even those estimates may now need to be revised, based on the January increase, which is historically one of the highest of the year. The State Statistics Committee blamed tariff hikes for municipal services including heat and water, as well as a rise in telephone costs of 25.9 percent, according to "The Moscow Times."

January inflation was over 5 percent in 10 of Russia's regions. It hit 5.8 percent in Moscow, the Interfax news agency said.

In addition to long-stalled tariff hikes at the start of 2002, the government seems to be struggling with the delayed effects of the 2001 boom, which was driven by oil profits.

Interfax reported on 7 February that the nation's money supply grew by a stunning 39.7 percent in 2001.

Economic officials remained upbeat about the government's ability to keep inflation down by maintaining a budget surplus and conducting "a moderately tough monetary and credit policy," the RIA-Novosti news agency reported.

Dvorkovich said the cabinet had approved "a package of measures to ensure macroeconomic stability," although it was not immediately clear what those measures are.

The government seems likely to rein in not only its second round of planned tariff increases for natural monopolies later this year but also its spending.

The 2002 budget calls for a primary surplus of 178.3 billion rubles ($5.8 billion) with optional spending of 68.5 billion rubles. It now seems that at least some of the discretionary spending will be canceled, since the budget assumed that tariffs would go up 35 percent in 2002. Dvorkovich ruled out any further tariff rises, although it is not certain his ministry will have the last word.

The government is being careful about its comments on the spending question, considering the sudden scope of the inflation problem this early in the year. Reuters quoted the "Kommersant-Daily" as calling inflation "the forbidden theme." Higher tariffs have already proved unpopular. Spending cuts will only deepen the political gloom.

The coming months may prove to be a test of the government's policies and its unity. President Vladimir Putin's economic adviser, Andrei Illarionov, has railed against tariff increases and called for lower oil prices to help cool inflation.

Other voices in the government have warned that revenues will suffer if oil prices fall too far. Memories are still fresh of the tough steps taken under former President Boris Yeltsin to wring inflation out of the economy.

Investment may lag if tariffs for gas and electricity monopolies are held back, hindering growth later on. Papers prepared by the Economic Development and Trade Ministry for the Thursday cabinet meeting reportedly cited a halt in economic growth in the fourth quarter of 2001.

Domestic investment by Russia's resurgent oil industry may also start to suffer due to high production and low prices at home. This week, Mikhail Khodorkovskii, chief executive of Yukos, the second-largest Russian oil company, said he would invest $4 billion in foreign ventures over the next three years.

"The Moscow Times" linked the "buying spree" in Europe to the drop in Russia's domestic oil prices. But higher prices would only have added to the January inflation jump.

The signs suggest a year of problems for the Russian economy after a period when everything seemed to go right. Putin's economic team may be better prepared than its predecessors, but so far, it is unclear what their strategy will be.