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. Last Updated: 07/27/2016

PM Orders Urgent Action on Economy

Prime Minister Mikhail Kasyanov on Thursday called on the Cabinet to take "urgent measures" to counter the re-emergence of barter and the increasing role of the state in the economy.

"Urgent measures are needed in order to address these negative trends and to prevent economic growth from further slowing," Kasyanov told Cabinet members during their weekly meeting.

"I am concerned with the increase of the number of state employees and the growth of barter transactions between state-owned companies, which is taking place for the first time in three years," Interfax quoted him as saying.

The World Bank on Tuesday warned that economic growth is in jeopardy because jobs are becoming more scarce in the most efficient areas of the economy while the workforce is growing in the most unproductive and low-paying area -- the state sector.

Most economists polled consider the trend worrying, but few expect any progress to be made in the near future.

The economy has slowed steadily since 2000, when it grew a record 10 percent. Last year it grew 5.4 percent and is on track this year to grow 4 percent. More worrying, Kasyanov said, is that growth continues to be natural-resource driven. While natural-resource sectors grew 6 percent from January to September versus 5.5 percent in the same period last year, manufacturing growth slowed to 3 percent from 5.5 percent, he said.

If the government is to achieve its aim of growing 8 percent to 9 percent per year over the next decade, it would have to reduce the state sector's share of gross domestic product to 25 percent from the current 36 percent, according to most estimates.

"This is a very difficult task in both a political and economic sense, which requires much more than just reducing staff," said Alexei Zabotkine, economist at UFG. "We don't expect any significant changes to take place before parliamentary and presidential elections in 2003 and 2004."

Another warning sign, economists say, is that both production and labor costs have reached maximum capacity, which translates into lower growth rates in the medium term.

Evidenced by the financial reports released this week by Sibneft and Yukos, as well as overproduction troubles plaguing flagship automaker AvtoVAZ, the costs of operating a business in Russia are rising at an unexpectedly high rate, analysts say.

"It is true that operating costs for industrial companies are on the rise, and wages are the most important factor," said Yevsei Gurvich of the Economic Expert Group think tank.

"The standard response to this problem has also become predictable, i.e., to fire large numbers of employees," said Chris Weafer, chief strategist with Alfa Bank.

Just this week, for example, AvtoVAZ announced that it may have to fire as many as 12,000 employees.

If the trend continues, a surge in unemployment will be unavoidable without new investments or a sharp rise in the number of small and medium-size businesses.

Gurvich said the paltry investment rate is the biggest threat in the near term.

"The rate of investment in 2002 is lower than economic growth, and this is the key factor preventing the economy from becoming more competitive and growing faster," he said.

Capital investments grew just 2.5 percent from January to September, three times lower than in the same period last year, according to government figures.