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. Last Updated: 07/27/2016

Optimistic Gref Predicts 5.5% Growth

With the economy still humming along strongly, the government Thursday upped its forecasts to predict that gross domestic product will soar a record 5.5 percent this year.

The expected growth, which would follow a GDP jump of 3.2 percent in 1999, is 0.5 percent higher than previous government estimates.

Economic Development and Trade Minister German Gref, in announcing the upgraded forecast, also said industrial output will increase 7.5 percent and inflation will be contained at 20 percent. The government had projected 18 percent inflation in the 2000 budget.

The economy year-on-year grew an estimated 7.3 percent in the first half of 2000, Gref said at a news conference.

Companies' enthusiasm over the government's plan to put a much-anticipated overhaul of the tax system in force by the start of 2001 could give the economy a further boost later this year, he said.

"Companies have been given the chance to construct their policy for the next half year with a view to the advantages they will receive from introduction of the Tax Code at the start of next year," Gref said.

He cautioned, however, that matching the first half's impressive growth in the second half will be difficult since Russia enjoyed an unprecedented growth spurt during that period of 1999.

The tax reform package, which was approved by the Federation Council on Wednesday, is expected to streamline the tax system by slashing crippling taxes and setting income taxes at a flat 13 percent.

The biggest blessing to companies will no doubt be reducing turnover taxes from 4 percent to 1 percent next year and to zero by 2003, economists said Thursday. Each percent of turnover taken by the taxman robs companies of 10 percent of their pretax profit, they said.

"Pessimists say that the income tax reform will have little effect because people are so used to hiding their incomes, but abolition of turnover tax will be felt through the economy," said Niina Pautola, editor of the Russian Economic Trends journal. "Three percent of turnover is a lot."

Meanwhile, Gref said the chemicals, petrochemicals and ferrous metals sectors are continuing to show month-on-month output growth, but July will show a downturn in output by the non-ferrous metallurgy, construction materials and forestry and paper sectors. He said the slowdown emphasized the need for quick structural reform f as outlined in the government's 10-year economic program, which Gref co-authored.

Finance Minister Alexei Kudrin also had warned senators ahead of their crucial vote on the tax package Wednesday that "the economic growth dynamic is moving toward zero."

While Kudrin may have simply been trying to scare the lawmakers into passing the laws, which they did. It was not off base with his warning, analysts said.

The windfall brought on by the ruble devaluation and enjoyed by Russian industry since the end of 1998 is now truly exhausted, they said.

"The exchange rate now compared with the pre-crisis period, in real terms, discounting inflation, is about 9.5 rubles to the dollar," said Christopher Granville, strategy and politics analyst at United Financial Group.

"That is certainly a big devaluation in terms of the ordinary family's pocket, but it is no longer enough to give Russian exporters major competitiveness."

The exchange rate just before devaluation in August 1998 was 6 rubles to the dollar.

Meanwhile, the specter of growth-dissolving inflation is looming as the Central Bank prints rubles to buy up oil dollars and the country awaits new price rises for fuel and power. Power giant Unified Energy Systems has kept its price increases way below inflation for the last couple of years despite a 30 percent increase this spring. The company is now insisting on a new hike to reduce its role as a milk cow for the Russian economy.

Despite recent falls in world prices for commodities such as oil, bumper export revenues will continue to be converted into dollars over the next few months due to the rule that allows companies to keep hard currency from sales abroad unconverted for three months, economists said. The government and Central Bank now have to ply a careful passage between rapid ruble appreciation, which is undermining export competitiveness, and excessive ruble supply, which is already evident as the Central Bank printing presses pump out currency to soak up oil dollars.

This dilemma will ease as the slumping oil price starts to be felt on the currency market, economists said.