EM: Last month you reported to the government that GDP growth is slowing down. What strategies will be adopted to solve this problem and increase growth?
GG: We have just completed analysis of the results of the first half of 2005, and reached the following basic conclusions. First, previous sources of GDP growth, and in the first place the build-up of oil and gas exports, are practically exhausted. The growth of oil exports in the first half of 2004 was 22.7%; for 2004 as a whole, 15%; and for the first half of this year, only 4.2%.
Second, a positive aspect of this year's picture is that domestic sources of development have come into play, and partly compensated for the declining impact of external factors. This resulted in an increase in the rate of growth in the second quarter over the first quarter. The expected growth rate for the year is 5.9%. First-half growth was 5.6% this year, compared to 7.7% last year.
Third, in any case, this increase in the second quarter is not stable, since outside the natural resources sector there are so far no sources of growth, except in communications.
To achieve stable growth rates near to our target of 7% plus per year, we need a substantial improvement in the quality of growth, and a shift from natural resources to innovation-oriented development.
Institutional changes are the most important part of this strategy. In the medium term, these will, firstly, allow the state to play a more effective role, through administrative and judicial reform, reform of the system of management of state property, local government reform and the development of private-public partnerships. Secondly, they will raise business competitiveness by strengthening property rights, improving tax and customs administration and anti-monopoly regulation, developing financial markets, improving the quality of corporate governance, developing mechanisms to support small business, achieving effective integration into the world economy, reforming the natural monopolies and making financial institutions more transparent.
Along with these institutional reforms, and qualitative development of our human resources, we need to shift to innovation- and investment-centred approaches to development, and to the implementation of a system of strategic national development projects that will have the state's active organizational and financial support.
These strategies fall into three groups. First, development of infrastructure and the traditional sectors of the economy, i.e. transport, oil and gas and agribusiness. Second, development of the new economy: science and innovation, information and communication technology, aviation and the military-industrial complex. The third group of strategies concerns the development of human capital: education and health services, the formation of a market in housing, housing services and construction.
EM: What is the effect of high oil prices on the Russian economy and how serious is the danger of one-sided economic development? What is the best way to combat "Dutch disease"?
GG: In 2005 the share in GDP growth of external price factors remained the same as in 2004. The dynamics of world oil prices suggest that the Russian economy is now moving into a phase at which further oil price rises will not boost GDP growth further. The oil price falls forecast in 2006–08 equate to a one percentage point reduction in GDP growth. The trend towards a reduction in the share of external factors could lead to a fall in the GDP growth rate in 2006 by up to 4–5%. If domestic factors are not activated, under conditions of falling world prices, then in 2007–08 growth rates could go down to 4.3–4.5%.
In the medium term, the sensitivity of the Russian economy to rising oil prices, especially above $30–35 per barrel, will abate substantially. Not only will the heavier tax burden result in less flexibility in production and export as prices rise, but also the strengthening of the real exchange rate will reduce the competitiveness of our processing industry.
EM: International investors have become very cautious about the investment climate in Russia. What can be done, and what is being done, about this?
GG: If we discuss facts and figures, we can see steady improvement over a long period: for example, foreign direct investment grew by 130% in the first half of 2005. The tax burden has been reduced, administrative barriers cut back, SMEs given support and many aspects of the legal framework put in order.
Nevertheless, there are three reasons that Russia is insufficiently attractive for investors. The most important one, in the investors' view, is corruption, the level of which is intolerable. The fight with corruption is one of our priorities. The two other reasons are – a lack of information, which produces in investors' minds all kinds of myths, and finally, and we are well aware of this, the Yukos affair. On this last point I'd like to say two things. Firstly, we can't constantly look back at the past. And secondly, today you can do business in Russia without breaking the law, and in that case there will be no reason to fear for your investments. As for the lack of information, the ministry of economic development has established an English-language version of its web site, is preparing a special investment bulletin, and taking other measures.
EM: What else would you like to say to the decision-makers at the IMF/World Bank meetings in Washington?
GG: I think that the representatives of these international organizations very well know all that has been said already. We need their objective assessments, even if they are not always pleasant to hear. Moreover, I would like to address investors, who have to resolve the dilemma "to be or not to be?" Russia has great potential, natural and human. The economic upheavals are in the past and we have established the foundations of an internally stable economy and the basis for long-term growth.