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. Last Updated: 07/27/2016

New Fiscal Strategy Brings Nation to '08

The government on Thursday adopted a new economic strategy paper that analysts said marked a shift to looser purse strings in the run-up to presidential elections in three years' time.

The document, designed to see the country through to 2008, foresees smaller budget surpluses and slower growth as well as a slightly firmer currency and declining inflation.

At a Cabinet meeting where the plan was approved, Prime Minister Mikhail Fradkov complained it was not ambitious enough.

"It seems to me that we are starting to fumble toward factors for domestic growth, but in the end we have not managed to unearth all the resources available," Fradkov said.

But analysts warned that Russia's super-prudent fiscal policies of recent years were coming to an end.

"The government is turning increasingly populist in the run-up to elections in 2008," Deutsche Bank economist Jens Nystedt said. "They are spending windfall gains and they are setting themselves up for downside surprises."

The document expects a budget surplus of 5 percent of GDP this year, dwindling to 1.6 percent in 2006 and 1.1 percent in 2008, based on a forecast for the benchmark Urals blend of $39 per barrel this year and $33 to $34 thereafter.

Fradkov, facing a vote of no confidence in the parliament over botched welfare reforms earlier this year, promised to double public sector pay by 2008. The government has also decided to raise the oil price above which money flows into its stabilization fund from 2006, meaning Russia will have more cash to meet spending promises -- but less saved against the day oil prices fall.

"In the sense of increased government spending to sponsor growth, new deal economics ... is pretty much already here," Renaissance Capital chief strategist Roland Nash said in a note. "It will probably result in a short-term economic boost, followed by much wasted money, higher inflation, the squeezing out of private investment, and a lower and more volatile equilibrium growth rate."

The government paper sees GDP growth hovering around 6 percent in 2006-2008, too slow to achieve President Vladimir Putin's goal of doubling the size of the economy by early next decade. It says Russia can no longer expect its oil sector, which helped the economy expand by more than 7 percent in the last two years, to shoulder the growth burden alone. After five years of impressive growth, oil output has stagnated in recent months, something analysts blame on the Kremlin's breakup of oil major Yukos, as well as high taxation.

Economists say that focusing on structural reform, backing the rule of law and cutting red tape prove a better platform for economic growth.

"There is a whole laundry list of things that need to be done. You don't stimulate sustainable growth by large government infrastructure projects or 'picking winners,'" Nystedt said.