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. Last Updated: 07/27/2016

Alarm Bells Ring Over Slow Pace of Reforms

The economy will start shrinking as early as 2004 if the pace of reforms doesn't accelerate, Deputy Economic Development and Trade Minister Arkady Dvorkovich warned Tuesday.

Dvorkovich's comments echo those of a growing number of economists who say the writing is on the wall -- after record 10 percent growth in 2000, the pace halved last year and is now just 4 percent.

"With economic growth of 4 percent, we will not last long," Dvorkovich told a business forum. "In two to three years we will have a slowdown or even a recession if we don't work hard."

The same sentiment has been expressed recently by everyone from President Vladimir Putin to economists, but no one has an easy answer.

Compounding the problem is the uncertainty over oil prices, fueled by worries of possible U.S. military strikes against Iraq. Russia is already too dependent on oil -- the IMF said this week such dependence makes long-term stability impossible -- and the government is redoubling its efforts to wean the economy off petrodollars.

But while many basic structural reforms, like the flat income tax, have been implemented, more technical reforms like overhauling the banking sector and legal system are proving more time consuming than originally thought. Dvorkovich said the government wants 10 years of 6 percent to 8 percent growth from 2006, but this won't be possible without attracting huge investments and undertaking a radical modernization.

If it wants sustainable growth, the government must cut its expenditures by nearly a third, Putin's top economic adviser, Andrei Illarionov, said Tuesday.

He said the government should cut spending to 25 percent of GDP from the current 35 percent.

If the ratio remains as it is now, economic growth will average 2.9 percent a year through 2015, according to Illarionov's Institute for Economic Analysis. But if spending drops to 25 percent of GDP, growth would average a whopping 8.9 percent, he said.

By contrast, if spending swells to 40 percent of GDP, the economy would grow just 0.2 percent over the period, Illarionov said.

Prime Minister Mikhail Kasyanov said Monday that the government considers lowering the tax burden the most important factor in sustaining growth.

"The government is working from the assumption that tax reform is the main factor ensuring stable economic growth," he said.

The state is taking "painful steps to lower its spending" by streamlining its operations to get rid of "excessive functions," he said.

Dvorkivich said the government could spend 30 percent less then it does and still meet its obligations, a move he said would allow tax cuts.

Yevgeny Gavrilenkov, senior economist at Troika Dialog, said that while the government understands the problems and knows how to solve them, reforms simply are being implemented too slowly.

He said the country has no choice but to accelerate reforms and cut expenditures because "there is no other way" to sustain growth.

"It was Adam Smith who said that for an economy to grow it needs low taxes, good laws and no war," said Vladimir Mau, rector of the Academy of the National Economy.