Publication: Monitor Volume: 7 Issue: 38

Andrei Illarionov, President Vladimir Putin’s outspoken economic adviser, has said that the Russian economy is now in recession. The only way to ensure a return to economic growth, he continued, is to have a 5-percent federal budget surplus. In an interview with the website, Illarionov cited just-released data from the government’s Center for Economic Conditions. This data shows that while the economy turned in an overall impressive performance last year, with the gross domestic product growing by more than 7 percent, industrial growth had already begun to drop off and go into the red late last year. Industrial growth for December 2000 was down 0.8 percent from the previous month. In January of this year it was down again another 0.8 percent from December. Overall, the volume of industrial growth last month was 2 percent lower than it was in October 2000. According to Illarionov, the figures show that the Russian economy is in a recession of “serious dimensions.” The presidential adviser said that the negative tendencies were even more pronounced in certain sectors. Thus, while the natural resource sectors–meaning mostly the energy sector–are either continuing to grow or experiencing only insignificant production drops, such sectors as machine-building, construction materials and ferrous metals have showed marked drops in production. The machine-building sector has been in recession for four months, having shrunk 9.5 percent since September of last year, while the production of construction materials has been shrinking for five months. January’s figures showed that the production of construction materials was down 8.2 percent from August 2000.

Illarionov said that an overall budget surplus of at least 5 percent was the only way to overcome the recession, and warned that if the government did not cut spending, the country would face a “very unpleasant situation” once world oil prices begin to fall (, February 22). Illarionov has repeatedly called on the government to reduce spending and criticized what he sees as its excessive dependence on oil export revenues and foreign loans (see the Monitor, October 26, 2000). His latest warning coincided with yesterday’s vote in the State Duma over controversial amendments to this year’s federal budget. Despite noisy criticism from the Communist Party of the Russian Federation faction, the parliament’s lower house voted overwhelmingly in favor of proposals to direct additional funds toward paying off Russia’s foreign debt. Among other things, the Duma passed a measure by which the first 41 billion rubles (some US$1.46 billion) in extra revenues–including money from a new round of privatizations–will go toward paying interest on the country’s foreign debt. The Communist and the Fatherland-All Russia factions had opposed lifting a ban on privatizing major state enterprises. Deputy Prime Minister Aleksei Kudrin said earlier this week that besides paying off the foreign debt, the government plans, among other things, to raise the salaries of state workers by 20 percent later this year (Moscow Times, February 22-23).

Also yesterday, the cabinet discussed the issue of state support for small business for the first time since last November. Prime Minister Mikhail Kasyanov said that the government in recent years had not created additional stimuli for the development of “one of the most important sectors of the Russian economy.” Kasyanov ordered the Finance Ministry and the Antimonopoly Ministry to work out a special taxation regime for small businesses, the state’s Sberbank to assist in organizing a system of crediting of small businesses, and the Property Ministry to make easier for entrepreneurs to rent state property (Russian agencies, February 22).

While Russia’s small entrepreneurs may welcome these gestures and statements of government support, their lives remain difficult thanks to the economy’s continued over-bureaucratization and concomitant corruption (something, it is true, the Putin administration has vowed to address), the lack of legal safeguards and the power of organized crime (which remains unchecked). As a result of such problems, there were only 875,500 small businesses registered in Russia as of last October–35,000 less than in 1994 (Segodnya, February 23). By way of contrast, Poland, whose population is practically four times smaller than Russia’s, had some 2 million small businesses as of 1999 (OECD Policy Brief, “Stimulating private enterprises in transition economies,” March 1999).