Interview of the Director of Combined Department for Macroeconomic Forecasts A.N.Klepach "On Russian economy prospects", News Agency "Prime-TASS", 27.10.2006.
Andrey Nikolaevich, how does the Ministry for Economic Development and Trade assess development of the Russian economy summarizing the results of the first three quarters of the current year?
- In general we assess economic development as being rather good. Economic growth during the first three quarters of 2006 accounted for 6.6% that exceeds our expectations. It is important to note that the growth was supported by increase of investment activities that makes me believe we would not only reach planned forecasted parameters for this year, but GDP growth and investment increase could even slightly exceed the Ministry for Economic Development and Trade forecasts.
However, dynamics of industry growth arouses concerns and, most probably, we would fall behind our forecasted estimations, first of all, due to unstable dynamics in manufacturing industries. In other words, quantitative growth exceeds our expectations while qualitative growth - slightly falls behind them. I mean that despite good results, so far economic growth is not fully stable.
Is the Ministry for Economic Development and Trade going to alter major projected macroeconomic indicators for this year and in medium-term forecasts?
- According to the Ministry work schedule, we are to revise our estimations for 2006 and forecasts for the following three years by the 1st of December.
That means you don't exclude forecasted GDP growth for the current year to be increased while industry growth to be decreased?
- Well, yes. September favourable dynamics allows to think that GDP growth estimate for this year could be increased from 6.6% up to 6.7-6.8%. Also we intend to increase forecasts for capital investments growth up to 12,7% from 11%. While industry growth dynamics this year fell behind our expectations, thus we would most probably, decrease this indicator estimate to 4,3-4,4% from 4,7%.
What is the Ministry for Economic Development and Trade forecast of the inflation rate in Russia in October and is it still possible to keep inflation in 2006 within projected 9%?
- According to our estimates, in October consumer price increase would account for about 0,3%, may be 0,4%, i.e. for ten months 2006 inflation rate accounts for 7,5-7,6%. By the year end inflation would account for about 9% or even 8,9%. Inflation decreases and it allows us to really meet the target indicator, however, inflation risks are still very high and not only from demand side, but first of all, from supply side.
On the one hand, petrol prices have slightly decreased and not only due to world oil prices adjustment but also due to seasonal effect. On the other hand, prices on horticultural produce, which decreased in September and October, would again rise by the year end. Prices on meat and bread would also increase.
The third factor considerably affecting inflation is consumer incomes which are growing rapidly. People do have money, consumer demand can neither be satisfied in full by mere domestic production nor by increased imports, therefore inflation pressure remains very high. Thus, inflation effect would mainly be seen in winter and spring 2007.
Wouldn't the Ministry for Economic Development and Trade revise its estimate of real effective rouble strengthening for 2006 forecasted at 7-9% when in January-September it accounted for 8.1% already?
- Taking into account that at the moment rouble rate is not being strengthened, I think that by the year end real effective rouble strengthening would not deviate significantly from 9%. Uncertainty in this question is related to other countries as well. In October consumer price index in the USA decreased and that, naturally, caused real rouble strengthening without any relative fluctuations on our market. This indicator might rise up to 10% due to such factors, but I believe it would account for 9.5%.
And how much will dollar cost by the year end?
I assume it would roughly cost what we expected it to cost - 26,7- 26,8 roubles per dollar.
Is the Ministry for Economic Development and Trade forecasting further reduction of oil prices this year due to price adjustments on the world market?
- It's too early to change our forecast of the average annual Urals oil price at 65 USD per barrel this year. What's important is that in middle-term economic growth forecast we have allowed for possible decrease of oil prices. In reality it happened slightly earlier than we expected, but this scenario has also been considered. However, I don?t think that oil prices would drop dramatically, that's why it is better to wait now. May be, we would adjust oil price forecasts for this and next years. These changes are important for revising dynamics of budget and Stabilization Fund revenues but insignificant fluctuations of oil prices would not substantially change economic growth indicators.
You?ve mentioned that quality of industrial growth is worsening. And what measures does the government intend to undertake to stimulate industrial development?
- We have submitted to the government the Action Plan on industry and technologies development for this and coming years. The Plan still requires approval of Ministries. However, those mechanisms can't change anything in a month, all of them are rather medium-term measures. There is no key with the help of which it is possible to restructure everything and to dramatically speed up economic growth.
Besides, this Plan is closely connected with the suggestions already considered by the government. The problem is that there are a lot of plans and decisions that are not carried out at full. The government has adopted packages on development of automotive industry, lumber industry, aircraft industry and transport that are being implemented by half as maximum. Also the issue of ministerial goal-oriented programmes is not thoroughly worked out. None of the approved programmes is included in the Draft Budget for 2007.
Action Plan submitted by the Ministry for Economic Development and Trade suggests two sets of measures. First of all, it covers general issues related to tax incentives for innovations - tax incentives for R&D, patent activities, new approach towards depreciation policy that should be implemented. All that would allow enterprises to actually receive tax incentive not on their profits but via improving depreciation methods.
Second of all, there are measures related to state development financial institutions. Talks on creating Bank for Development that would complement Investment Fund and Venture Corporation instruments have started long ago. The Plan comprises the concept and specific suggestions on how to set up this state financial institution. The third instrument should be created and it would take its niche and would act as a powerful credit arm for manufacturing industries and for high-tech exports support. Having reinforced those instruments with sufficient financial resources we could considerably increase financial capacities of manufacturing sectors, and, above all, support them in implementing long-term risky projects on both domestic and world markets. All those measures, first of all, are aimed at economy diversification and on strengthening innovation constituent of the economic growth.
We also suggest developing long-term forecast of economic growth which would show our priorities in terms of industries development, their competitive advantages at the moment and how they could be improved in middle and long-term prospects. Such forecast would tie together long-term regional strategies with works on energy strategy updating and with forecast of scientific and technological development. It is obvious that forecast, as it is, changes nothing in economic growth rate, but it acts as a certain guideline for government authorities and, first of all, for business.
There are also other measures that influence economic growth rate directly - national projects on agriculture development and housing, as well as widely discussed questions related to revising energy and gas tariffs. However, way of considering and implementing of those measures differs from the suggested Plan.
But earlier the Head of the Ministry for Economic Development and Trade German Gref said that work on setting up the Bank for Development is to be completed this year. However, according to the Plan submitted to the government legislative base for this financial institution is to be adopted only in the first quarter 2007.
- It happened because we are talking not only about our work. This draft law should be considered and approved by the government. If we manage to solve the whole range of questions and finish the work this year - it would be great. That is why timing of decision making would also be revised.
The Plan presupposes that draft law on Mineral Extraction Tax incentives for shelf fields development would be submitted to the government in the second quarter 2007. Does it mean those incentives would be introduced from 2008 and what fields would they apply to?
Originally we planned those incentives to apply to shelf fields as well, but the government finally decided to introduce MET differentiation from the beginning of next year only for Western Siberia fields development. I hope that the decision on applying those incentives to shelf development would be made next year, but before this draft law should be approved by other Ministries and submitted to the government. We believe that incentives should apply to both oil and gas fields starting from 2008.
What measures is the Ministry for Economic Development and Trade developing to provide for trade discipline at wholesale and retail markets to protect interests of Russian producers and citizens?
At the moment I can only say that we are developing federal legal base for regulating and developing retail markets. It comprises both general statute on markets set up and amendments to the Code of Administrative Violations and other legislative acts.
The main aim of all those actions is to increase transparency and effectiveness of market activities in order to facilitate competition principles in the market operations, to make access to such markets for producers and their associations easier and to turn markets into fully civilized form of trade.
While making such long-term decisions at the federal level, we hope that regional authorities would not only fulfill those requirements but would also suggest their own new additional measures, as key levers of power are concentrated in the regions.
