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. Last Updated: 07/27/2016

Gref, Fradkov Square Off Over GDP

Itar-TassEconomic Development and Trade Minister German Gref arriving on Thursday for a Cabinet meeting, where he said doubling GDP by 2010 was "unrealistic."
Economic growth is slowing and gross domestic product will not double by 2010, regardless of the target set by President Vladimir Putin, Economic Development and Trade Minister German Gref said at Thursday's Cabinet meeting.

A visibly agitated Gref told Prime Minister Mikhail Fradkov that the goal of doubling GDP by 2010 was "unrealistic." The remark was made during a harsh exchange between Fradkov and Gref, after Gref's ministry presented figures showing that growth had slowed to 5.4 percent from January to May, down from 7.5 percent over the same period last year.

"Do whatever is necessary ... so that the mid-term program that envisions doubling GDP is achieved," said Fradkov, who has repeatedly complained that ministers are not doing enough to meet the target.

"Search, search for sources of economic growth, let's create the resources -- meat, car building, create jobs, clarify the tax policy, the policy for small and medium businesses," Fradkov said, RIA-Novosti reported.

"German Oskarovich, we have no alternative," Fradkov told Gref.

But Gref said calls for quick fixes to meet the GDP target, including state intervention to diversify the economy, missed the point.

"The most correct way is to reform the entire system, to improve the investment climate," Gref told reporters after the meeting, Interfax reported.

Although Gref's declaration that doubling GDP by 2010 was out of reach came as little surprise to analysts, they welcomed his sober analysis of the problems facing the economy.

Gref's ministry on Thursday had little cheer to offer Fradkov, listing instead a series of problems that needed to be dealt with if the economy is to match the growth figures of recent years.

The ministry's figures showing GDP growth to May slowing to 5.5 percent were in line with a forecast by the International Monetary Fund, which expects GDP growth to fall from last year's 7.1 percent to 5.5 percent this year.

According to the ministry's provisional data for the first five months of the year, year-on-year growth in most key sectors has been steadily slowing. Year-on-year industrial growth for May was just 1.4 percent, while slower growth rates were also recorded in oil output and investments. At the same time, imports are growing, creating extra pressure on domestic producers, the ministry said.

"The only main component of GDP that still shows high growth this year is household consumption," the ministry said. "High oil prices no longer positively affect growth rates. Excess petrodollars are removed by the stabilization fund to help improve the country's financial situation, but are not used to develop the economy."

And while household incomes are growing by around 10 percent per year, fueling demand, the supply side of the equation is lagging behind. For the first time in recent years, inflation is rising due to nonmonetary pressures, the ministry said.

Prices rising as a result of growing consumption have already led the government to adjust its inflation forecast for 2005 upward to 10 percent, 1 1/2 percentage points off its original target of 8.5 percent.

Although high demand can typically encourage producers to boost production, in Russia the classic formula may not work, Gref's ministry and analysts warned Thursday, citing a fear of political instability and a lack of trust from the business community in the authorities and their intentions.

"Low investment activity is mostly connected to the general problem of a lack of trust between business and the authorities," the ministry said in its report.

And without investment, analysts said, catching up with growing demand is an uphill struggle.

Yevgeny Gavrilenkov, chief economist at the Troika Dialog investment bank, said that growing incomes tend to encourage consumers not just to purchase more goods but also to opt for better-quality products. Unfortunately, he said, these are the very things that the vast majority of Russian producers cannot supply.

"They could theoretically start producing better goods, but that requires investment," Gavrilenkov said. "But to make a decision to invest, producers need political stability.

"It's like in Britain: Everyone knows that the system is there to stay for 100 or 200 years," he said.

Gavrilenkov pointed out that in 2003, the macroeconomic conditions very much resembled those observed now.

"But then production was growing at over 7 percent per year, fueled by investment," Gavrilenkov said. That investment was fueled by a much stronger belief that the country had a stable, predictable future, he said.

"It's all about stability, stability and stability again," Gavrilenkov said.

Consumers' desire to spend money on better-quality goods was clearly shown by the Economic Development and Trade Ministry's figures on the car market, where sales of imported cars are rising quickly, in stark contrast to trends in domestic car manufacturing.

A total of 205,300 foreign cars, worth a total of $2.04 billion, were imported in January through April, compared with 124,200, worth $1.29 billion, over the same period last year, the ministry said, citing Federal Customs Service figures.

Meanwhile, Russian car production, despite protectionist measures like hikes in import duties, fell by 5.7 percent from January to May, with the largest drop of 6.6 percent in May.