Economy Faces Hardest Year in '95, Yasin Says

Next year will have to be the hardest ever in the course of Russia's reforms if the country wants to achieve economic stabilization, Economics Minister Yevgeny Yasin said Thursday.


"If we manage to impose strict financial discipline and achieve financial stabilization, 1995 will be the hardest year," Yasin told a press conference. "It will be as hard as we had hoped 1994 would have been."


In Yasin's understanding, financial stabilization would mean driving monthly inflation down to 2 to 3 percent, maintaining tight spending, investing only in short-term, high-return projects, and shifting the tax burden from companies to individuals.


"If we want to succeed in 1995, we must show the qualities we have not been able to fully display in 1994," said Yasin, who only took office last month.


He described this year's results as both encouraging and disappointing -- a year when "we became convinced that it is possible to overcome the crisis, to stabilize the financial system and then the economy as a whole." The government followed that route until mid-summer, but then it slid into what Yasin called an overly gentle and indulgent policy giving in to pressure from industries to issue cheap credits .


The change of course reversed previous successes and led to soaring inflation at the end of the year, he said.


Inflation stuck to about 4 percent in summer, but it exploded to 15.1 percent in October and 14.1 percent in November. Analysts have predicted that it will reach 15 percent again in January.


Yasin refused to give his own estimates of inflation, saying: "I would not like to tell lies, on the one hand, or to create inflationary fears on the other."He added, however, that inflation was likely to drop this month, but that it "always jumps in January."


Other prominent cabinet members, including First Deputy Prime Minister Anatoly Chubais and Finance Minister Vladimir Panskov, agree with Yasin's program for stabilization. But it has met with resistance from industrial lobby groups both in the government and in parliament.


"There are grounds for saying that stabilization is possible and this question hinges on political will, the desire of the government to achieve the goal set," Yasin said.


The battle fought over the issue of oil export quotas has been a test case of the strength of reformers' influence on economic policy. Yasin, Chubais and a number of other ministers are known to advocate complete liberalization of both domestic and foreign oil trade, while their opponents insist that export quotas should be replaced with domestic quotas, effectively limiting exports.


The International Monetary Fund and the World Bank, which are negotiating billions of dollars in loans to Russia, are firmly opposed to restrictions on oil exports.


Yasin said Thursday that a draft resolution had been submitted to Chernomyrdin, who has the final say in the dispute, providing for mandatory domestic sales of 65 to 70 percent of total output.


The minister said his opinion on the draft has yet to be requested, but that he would not approve it.


He also came out in support of the British metals trading firm Transworld, which has become embroiled in a dispute with the Krasnoyarsk Aluminum Factory over the deletion of Transworld's right to most of a 20 percent stake it had purchased.


"The case should go to the court of justice to confirm their (Transworld's) rights," Yasin said. "Arbitrariness in cases like that is extremely dangerous, because it discourages both domestic and foreign investments."


He also said that a more favorable environment should be created for foreign investment, including tax breaks for projects that reinvest Russian profits into local production.


In general, foreign investment is crucial for a revival of the economy, Yasin said. "We have noted that wherever there is foreign investment, domestic investments also increase."


In what Yasin himself described as an unpopular approach, he also called for the introduction of higher income taxes as part of a tax reform plan that would take some weight off producers.


"In queues, if there are still any, I am regarded as somebody who wants to cause harm to the population," he said. "But it is a mistake to think that taxes on producers are paid by anyone else than the population. Some things are obvious and some are not."


"Income taxes in Russia are probably the lowest in the world," Yasin said. "About 95 percent of the population pays a 12 percent income tax, one percent less than in the Soviet Union."


The reform Yasin proposes would increase the minimum income tax to 14 percent, lower the level of income taxed at 20 percent to 7 to 8 million rubles (about $2,000) per annum, and hike the tax rate for top earners to between 35 and 40 percent. It would also set higher taxes on property and luxury items.


In the past month, the State Duma, the lower chamber of the parliament, has twice rejected a draft income tax law written along the same lines by the Finance Ministry.