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. Last Updated: 07/27/2016

Cabinet Approves Budget For 2002

The Cabinet heeded warnings from President Vladimir Putin on Thursday and approved the draft 2002 budget with provision for meeting foreign debt payments and boosting the living standards of servicemen and state employees.

The approval came as the government raised its forecast for annual inflation in 2001 to 14 percent to 16 percent from 12 percent to 14 percent due to unexpectedly high price growth in January-May.

Finance Minister Alexei Kudrin said ministers had backed the budget at a meeting during which Prime Minister Mikhail Kasyanov urged them to adopt a realistic approach.

"The government has decided to approve the main parameters of the 2002 budget," Kudrin, also finance minister, told a news conference. "The budget will provide for a balanced economy, allow for necessary reforms and obligatory payment of all interest and noninterest spending regardless of external factors and jumps in oil prices."

Putin has been critical of ministers in the past week, pointing to what he saw as delays in raising miserable pay levels for the armed forces and failure to meet budget targets.

In his address to ministers, Kasyanov singled out pay for Russia's military and public sector workers as key issues.

"The federal budget for 2002 must be realistic. … The executive authorities have a common understanding of the problem — the main task is how to manage the resources the country has."

Kasyanov said that in the past a military graduate was considered a very eligible man, but now "going to the provinces he does not know how to feed himself."

The top wages for public employees are now lower than their state pension, a state of affairs that would be difficult to right. "It is difficult to see how we can go on living with such a disproportion," Kasyanov said.

Russia, he said, had to lessen its vulnerability to changes in world energy and metals prices.

Kasyanov said on the eve of the discussion that Putin had agreed to postpone a government reshuffle for two weeks. Kasyanov's dismissal had been rumored for months, but he is now expected to remain, whatever changes are made.

The 2002 draft budget foresees gross domestic product growth of 3.5 percent, sharply down from 8.3 percent last year and described by Kasyanov as "the minimal growth rate Russia can afford" to catch up with developed European countries.

Kudrin also said the budget allowed for a nearly 20 percent increase for defense to 262.9 billion rubles ($8.35 billion at an average 2002 exchange rate of 31.5 rubles per dollar).

He said Russia would be able to service its foreign debts even if oil price fell below the $17 per barrel level required to keep the budget in surplus.

"Even if oil prices are unfavorable, we have different ways of making good any budget gaps. That is why I speak about 2002 with courage," he said.

He said Russia would use the sale of unspecified reserves, privatization receipts, borrowing on foreign markets and leftover revenue from 2001 to raise $6.8 billion to meet 2002 foreign debt payments.

Kasyanov repeated Russia would not seek to restructure its foreign debts next year or the peak payment year of 2003, and "must rely upon its reserves, which are large."

He said the government had to streamline spending. "We spend a lot, but by spending more efficiently, we will find hidden reserves," he said.

The 2002 draft budget also projects inflation slowing to 12 percent to 13 percent, a figure Kudrin said would be attainable despite the fact that the government on Thursday revised its 2001 budget inflation forecast to 14 percent to 16 percent. Kudrin said monthly inflation was expected to slow through the rest of 2001 after hitting 10.9 percent in January-May.

"We entered 2001 with a higher monetary base, but we are strictly regulating it now and it has no influence on inflation," he said. "We need to cut tariffs for the natural monopolies."

"Inflation rates will shrink each month now," Kudrin added.

Earlier, Central Bank head Viktor Gerashchenko warned high growth in consumer prices at the start of 2001 could force the government to raise inflation targets set out in the budget.

"In the first quarter of 2001 and in April and May inflation has been steady at 1.5 percent to 1.8 percent. This naturally raises some concerns," he told a banking conference in St. Petersburg.

He blamed rising inflation on structural changes in some sectors of the economy, but said there was no reason to be alarmed. "Some upturn in inflation is not radically dangerous," he said.

May inflation was 1.8 percent, unchanged from April levels, but still higher than the government had expected.

Gerashchenko said the Central Bank had to control the monetary base and soak up excessive ruble liquidity sparked by the bank buying up dollars to fill out its reserves.

Kudrin said despite unexpectedly high inflation this year the government could stick to inflation predictions in the 2002 draft budget.

But some people were more concerned about the revision, including Alexander Zhukov, head of the budget committee in the Duma, who forecast annual inflation in 2001 at 17 percent to 18 percent.

"The fact that inflation turned out to be higher than expected is a worrying symptom, and the government and the central bank need to take serious measures to cut it," he said.

UFG brokerage warned it expected more inflationary shocks in the summer coming from a sharp hike in railway prices and an increase in the tariff companies pay for natural gas supplies.

"On the whole, prices remain unstable with low visibility over the next 12 to 18 months," it said in a research note.

Duma Speaker Gennady Seleznyov said the chamber was worried by Gerashchenko's forecasts and planned to discuss inflation at its autumn session. "This is a very serious question," he said.