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. Last Updated: 07/27/2016

Kasyanov Lays Out Plans for Economy

On the eve of his departure for the World Economic Forum, Prime Minister Mikhail Kasyanov offered a glimpse into the Cabinet's plans for the future, which range from holding down inflation to reducing the number of cars on the road sporting flashing blue lights.

He also lauded the government's economic achievements over the past year and vowed to reduce the state's involvement in the economy.

"The government is resolute in its determination to lower inflation from last year's 18.6 percent to 12-14 percent this year," Kasyanov told reporters Tuesday. He called relatively high inflation of 2.4 percent in January a seasonal fluctuation that does not contradict the Cabinet's year-end expectations.

"A [monthly inflation] level of just over 1 percent was reached in the second half of last year. This tendency allows us to say that the forecasted inflation rate will be achieved," Kasyanov said.

Across town, the president's top economic adviser, the outspoken and often critical Andrei Illarionov, said the forecast corresponds fully to official assumptions and may even be realistic -- if "an appropriate monetary and credit policy is implemented."

Overall, there are more reasons to be optimistic than pessimistic, and there is no reason to fear a repeat of the 1998 crisis at present, Illarionov told a group of economists. Both falling oil prices and an aggressive approach to debt payments provide hope for the economy, he said.

High oil prices have led to ruble appreciation and increased spending power. But rather than driving economic growth, increased domestic demand has led to an upswing in imports, Illarionov said. Domestic producers and their inferior products are losing out to higher quality imports, while real appreciation has crippled their competitiveness. Illarionov called for the government to block further increases in the real ruble exchange rate, which grew 18 percent on average in 2001.

Not that Illarionov advocates cutting oil exports or output -- the country should accept low oil prices as strategically beneficial, not something Russia can influence, he said.

"Holding back oil exports and reducing production is not only counterproductive, but suicidal," Illarionov said.

In terms of meeting its debt obligations, the country should have no problems and feel no pain, even when debt payments peak in 2003. This is due to early payments made in 2001 and a halt to borrowing from international financial institutions, Illarionov said. Russia's total foreign debt decreased $10 billion last year to about $133 billion.

However, Illarionov warned of a creeping tendency toward higher government expenditures as a percentage of gross domestic product, an expanding role of the natural monopolies in the economy and real appreciation of the ruble.

"There is a danger that the economic slowdown could be long term because of the underlying long-term structural factors," Illarionov said. "The government is too large for the economy," he said, calling for deep reform of budgetary expenses, government regulation and "the so-called natural monopolies, [which] are unnatural because government regulation created them."

Government expenditures in 2001 increased 1.5 percent to reach 35 percent of GDP, which is "completely unacceptable for the current level of economic development," Illarionov said. The nonmarket sector counted for 47.6 percent of GDP in 2001.

Natural monopolies' share of GDP rose 1 percent, and is likely to continue growing, because planned tariff hikes in 2002 are higher than the expected rate of inflation.

Kasyanov agreed that the state's involvement in business should and will be reduced, in order to minimize the state's control over the economy.

"At the moment, the government is part of the economy in a way it should not be," Kasyanov said. "This includes not only banking, but the economy as a whole."

The government plans to conduct a thorough, across-the-board analysis and inventory of state-controlled enterprises at all levels. It will spin off stakes in a variety of businesses, particularly banks, Kasyanov said.

The first in line will be enterprises in which the state owns less than a 25 percent blocking stake. In the banking system alone, the state holds such stakes in more than 400 organizations, which, Kasyanov said, cannot be considered effective investments.

Improving support for small and medium-sized business will be another priority for 2002, Kasyanov said.

"The number of such companies in Russia is currently close to zero," he said, adding that a key task this year is to simplify taxation for small enterprises in the second part of the Tax Code, which is coming up for debate in the State Duma.

In Illarionov's opinion, the government should decrease the tax rate for all businesses, but only in conjunction with a reform of budget expenditures. Otherwise, he said, as the economy slows down the government could face budget deficits like it has for most of the past decade.

In addition to the second part of the Tax Code, the Cabinet will turn its energies to a number of other hot legislative issues. The government plans to submit to the Duma new laws on alternative army service, the pension system, mandatory insurance and mortgages.

However, even as the Cabinet gears up for more reform, implementation remains a chief concern.

"The Cabinet's main goal this year is to secure the unconditional implementation of laws," Kasyanov said.

On Feb. 14, the Cabinet will hold a special session to hammer out measures ensuring that reformist laws are put into practice and enforced, Kasyanov said.

Amid tasks of epic proportions, such as pension and banking reform, the Cabinet found time to tackle a notorious problem in Moscow -- the thousands of cars equipped with cop-like flashing lights and blaring sirens that hurtle along with utter disregard for traffic regulations. The government has issued about 1,200 licenses to use such devices. Other authorities have issued almost 3,000 more.

According to Kasyanov, as of April 1 the government will completely monopolize the process, cutting the total number of licenses issued to about 900.

Kasyanov is due to visit Washington and attend the World Economic Forum in New York over the next six days. He is scheduled to meet U.S. President George W. Bush and other key state officials, as well as representatives of the U.S. and world business elite.