In this issue...

- Central Bank says 2001 CPI forecast may be hiked

- Kasyanov – Gov’t to meet 2002-03 debt payments

Earlier stories...

- Duma not seen fighting 2002 budget - Zhukov

- Central Bank says 2001 CPI forecast may be hiked

ST PETERSBURG - Russia's Central Bank Chairman Viktor Gerashchenko said on Thursday that higher than expected inflation in the first five months of 2001 may prompt an increase in the annual inflation forecast.

"In the first quarter of 2001 and in April and May inflation has been steady at 1.5-1.8 percent. This naturally raises some concerns," Gerashchenko told a banking conference in Russia's second city.

"It is likely that the government and the central bank will have to analyse these inflation trends. The (annual) figure may be increased," he said but gave no estimate figure. The government based the 2001 budget on an inflation forecast of 12-14 percent. A draft budget for 2002 due to be discussed by the government on Thursday contains an inflation forecast of 12-13 percent for the year.

COMPLETE COVERAGE Interactive - Go to the message board Government links: - Central Bank (Russian) - Ministry of Finance (Russian) - Russian government - Ministry of Economic Development and Trade - Governmental Center of Strategic Studies Russian site links: - Russian Stock Market - Economic Expert Group - Econometric Unit VEDI - Voice of Russia - economy - Institute for the Economy in Transition Foreign site links: -Hoover Institution - Russian-European Centre for Economic Policy - International Montery Fund on co-operation with Russia - European Bank of Reconstruction and Development (EBRD) on co-operation with Russia The Russia Journal links: - Read the earlier economy news from the RJ ticker. - Russia, the West and Gaidar(23 Mar, 2001) - The government’s golden grab(17 Mar, 2001) - Parked in neutral(03 Mar, 2001) - Is Russia protected from future economic shocks?(24 Feb, 2001) - Breathing life into Russia(24 Feb, 2001) - We can no longer vouch for the reformers(24 Feb, 2001) - Russian market takes hit(03 Mar, 2001) - Government challenged by reform of monopolies(27 Jan, 2001) - The ‘2003 problem’ not new(20 Jan, 2001) - Illarionov goes on the warpath(20 Jan, 2001) - Good, but not good enough(13 Jan, 2001) - Russia’s economic agenda(13 Jan, 2001) - Kiriyenko keeps eye on economy(16 Dec, 2000) - RJ street Poll: Has the overall improvement in Russia's economy helped you?(25 Nov, 2000) - Made in Russia: Russia eyes its export sector to boost economy(18 Nov, 2001) - Inside the economy: Concerns from the IMF(09 Sep, 2000) - It’s all in the economy(26 Aug, 2000) - 2 years on, Russia's economy 'healthy'(19 Aug, 2000) Special Reports: -Special report. Russian economy: Which way is it heading? Opinion: -Cutting Russia’s debt burden (27 Apr, 2001) -Russia, the West and Gaidar (23 Mar, 2001) -Editorial: The big test (03 Mar, 2001) -The ‘2003 problem’ not new (20 Jan, 2001)

May inflation was 1.8 percent, unchanged from April levels, which was higher than the government had expected. Consumer prices rose 10.9 percent in the first five months of the year, up from 6.8 percent in the same period last year.

Gerashchenko said rising inflation was due to structural changes in some sectors of the economy, but overall the economic situation remained stable.

"Some inflation upturn is not radically dangerous," he said.

Gerashchenko said building up gold and foreign currency reserves was important as the country had to repay foreign debts, of which about $14 billion fell due this year.

But the central bank also had to control the money base and try to soak up excessive rouble liquidity, a likely result of massive buying of dollars, he added. Russia's steadily growing foreign currency and gold reserves rose to an all-time high of $33.0 billion on May 25.

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- Kasyanov – Gov’t to meet 2002-03 debt payments

MOSCOW - Russian Prime Minister Mikhail Kasyanov said Thursday that the government will try to avoid restructuring debt payments falling due in 2002 and 2003, Itar-Tass reported.

Counting interest and principal repayments on domestic and foreign debt, the government must pay $20.4 billion next year and face a payment spike to $27.5 billion in 2003, according to the Finance Ministry's draft 2002 budget. That budget plans an overall surplus of 1.3% of gross domestic product next year, including all debt payments.

"The federal budget for 2002 has to be realistic," Kasyanov told a cabinet meeting called to discuss the tax and spending plan.

The budget must be implemented "in conditions of absence of restructuring our foreign debts," he said.

The government earlier this year tried to persuade the Paris Club of sovereign creditors to restructure payments of $2.4 billion on Soviet-era borrowings. Creditors, led by U.S. Treasury Secretary Paul O'Neill, insisted Russia had the resources to meet its obligations.

The Russian government eventually backed down and agreed to make payments as scheduled, but said it may seek to restructure the 2003 debt payment peak.

So far this year, the government has run an unexpected overall surplus, thanks largely to high prices for the oil and gas that dominate the economy and exports.

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Earlier stories...

- Duma not seen fighting 2002 budget - Zhukov

NEW YORK - The Russian Duma's top tax and budget man said on Tuesday the draft 2002 budget, just given to President Vladimir Putin's cabinet, is likely have a warm reception in the lower house of parliament come September.

Alexander Zhukov, the Chairman of the State Duma Committee on Budget, Taxes, Banks and Finance, said he didn't know the exact details of the preliminary draft, but said: "I think it will be received well because the majority of the Duma supports the government of Putin."

"In any case it should be a balanced budget, that is the main thing," Zhukov added in an interview with Reuters.

The Putin government presents the budget for 2002 to the Duma on September 1. In its current form, it is the first budget in the post-Soviet era that provides for a surplus.

The budget targets a surplus of 1.26 percent of gross domestic product and forecasts annual inflation in 2002 between 12 and 13 percent.

On the issue of tax reforms, Zhukov told a gathering of investors and analysts, organized by New York-based political and economic think-tank, Eurasia Group, that the current version of the profit tax should make it through the last two readings without too many changes.

The first reading concluded last Friday with a second reading set for June 20. A final reading could come in July before the Duma goes on summer holiday.

"I think the main ideas will be largely the same" with some changes to lower priority items, he said.

The government has said its profit tax reforms would reduce the overall tax burden by roughly 100 billion roubles ($3.43 billion) a year due to various deductions from the tax base, but the tax rate itself would be kept unchanged at 35 percent.

Speaking in broad terms, Zhukov said one main difference with the old profit tax would be an allowance for businesses to fully deduct all their ordinary business expenses, with limited exceptions. Zhukov held out advertising and employee education as just two examples on a list that is expected to grow.


CAPITAL EXPENSE DEDUCTIONS UNRESOLVED

Last Friday, the budget committee backed a compromise to let banks and professional securities markets players create provisions for the depreciation of securities and agreed to limit the deductibility of bad debt provisions by a percentage of sales.

The committee and the government agreed on changes to amortisation terms, aimed at saving the government up to 80 billion roubles.

At present, one point of contention is the unresolved issue of a 50 percent deductibility of capital expenses. The committee backed Duma proposals to extend this privilege to all firms, whereas the government wanted to confine it to production industries.

While the Russians are keeping the marginal tax rate the same, they "are going to basically join the rest of the OECD (Organisation for Economic Cooperation and Development) countries by, not quite harmonizing, but following the same concepts," on reasonable business expenses, said John Sheedy, partner at Coudert Brothers, a multi-national law firm.

Sheedy, who worked in Russia from 1993 through 1996 for Coudert said: "To hear from the horse's mouth statements that are encouraging and that reflect an understanding of investors needs reflects a positive constructive approach."

The Russian government, having made tax reform a top priority, wants parliamentary approval for parts of the tax code relating to the profit tax, as well as other changes, done this year so they can go into effect Jan. 1, 2002.

Zhukov, a former Ministry of Finance employee who was elected to the Duma from Moscow in 1993, boasted that personal income tax collections, following the introduction of a 13 percent flat rate, is up 64 percent in the first five months of this year compared to a similar period a year ago.

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