Russia economy impact sectors part 1
February 8, 2008 – 3:20 amRussia’s economy is currently outstripping even the wildest expectations. At the end of 2004, the country’s gross national product (GNP) rose by more than 7.1 per cent, making it one of the highest growth rates in Europe. The growth dynamism is more robust than anticipated, with prospects for the years to come also continuing to be very promising. Both the Russian government and international analyst reckon in the medium term, growth rate will increase an average of between 5 to 7 per cent.
Rising Income Triggers Increased Consumption
Private consumption is becoming more and more one of the most significant pillars of the economy. Real income is rising, and the desire to consume grows visibly. However, one should bear in mind that despite all the business opportunities around the corner, very large disparity in income exist between individuals as well as between regions. Wages in Russia have risen strongly in recent times although the rate has dropped slightly. Nominal wages increased by 25.4 per cent in 2003, 28.2 per cent in the first six month of 2004, compared with the same period in the previous year (previous year’s increase was 34.6 per cent). Real wages rose by 10.3 per cent in 2003 and 15.8 per cent in the first six month of 2004 (compared with 16.2 per cent in the previous year).
A large part of wages and their levels are not published-primarily to save taxes and deductions. This means that all official figures in connection with per capita income should be viewed with some caution. With this in mind, the economic research centre estimates the actual increase in nominal wages to be as high as 30.1 per cent in 2003, and the rise in real wages to be 14.5 per cent. The excellent budgetary situation has enabled wages and salaries to be significantly increased in the public sector.
Tax Reform as Foundation for Further Development
Since 2000, the Russian government has been successful in concluding the national budget without a deficit. Despite tax reductions, the surplus in the federal budget was higher than expected (in 2004, value added tax was reduced from 20 to 18 per cent. A further reduction in 16 or 15 per cent is planned, together with standardization of VAT).
The positive balance of the federal budget in 2004 was 4.2 per cent of GNP. The rate of inflation continuous to fall from: 13.7 per cent in 2003 to 10.9 per cent in 2004. A reduction of the so-called uniform social tax (contributions, amongst others, to pensions and health insurance funds) has already has been agreed. Lower income group will, above all, benefit from this move. The average rate of tax will drop from 29.4 per cent to 24.3 per cent. The relief for companies paying this tax for their employees will amount to 280 billion rubles (in excess of US$ 10 billion). The government expects that firm will take advantage of the savings to increase wages, or to legalize their actual level.
Lowering of Inflation Rate, Consumer Price Development
The government achieved the goal of cutting the rise of consumer prices to level of 12 per cent in 2003. A further reduction to a maximum of 10 per cent was projected for 2004, and subsequent reduction to 4 to 6 per cent by 2006. The reduction of tax burden (lowering of VAT, abolition of sales tax) had a positive effect. The strong ruble serves to lower the costs of imports. The rise in prices will certainly also be dampened through the presence of foreign trading companies, and increasing competition in this sector.
