It has been said that there are lies, damned lies and statistics. Statistics are versatile things – you don't have to falsify them to obtain the desired picture; it's enough to just manipulate them the right way.

The Economic Development and Trade Ministry recently announced that GDP growth over the first quarter of 2001 was 4.2 percent above the same period last year. Earlier, First Deputy Chairman of the Central Bank Tatyana Paramonova, quoting the Central Bank's own statistics, gave a figure of 3.4 percent for GDP growth and said this was one of the best results in the world. This is all true, but it's not the whole truth.

For a start, one should remember that GDP grew by 7.7 percent for 2000 as compared with 1999, and this means that the first-quarter figure for 2001 actually represents a slowdown in GDP growth by half when compared with last year. The other thing to remember is that 2000 was an unusually favorable year for the Russian economy and unprecedented in the last 30 years, if not more.

After going through a period of stagnation throughout most of the 1980s, Russia experienced a sudden and deep recession at the end of the 1980s and the first half of the 1990s. This recession saw productivity cut almost in half at a time when the global economy was growing unexpectedly fast. As a result, Russia slipped from being one of the foremost industrial nations to joining the ranks of the second- or even third-rate industrial countries.

Unstable and slow growth in the mid-1990s gave way to financial crisis in 1998, which again threw the country back several years. Moderate growth in 1999 followed by record growth in 2000 brought indicators back up to 1997 levels, but only for production. People's real incomes remain below their pre-crisis levels.

Offsetting the economic losses of the last decade would require at least 10 years of growth as high as last year's. The government economic strategy, known as the Gref Program, originally based its forecasts on annual growth rates of 8-10 percent, but then revised them down to a more modest 5-6 percent. By the government's own estimates, the current 3-4 percent growth rates obviously aren't high enough to meet the country's needs.

This year began with negative economic anticipations as world oil prices started to slide. This raised fears that Russia's oil windfall would come to a swift end. But time has gone by, and OPEC countries have managed to hold prices close to their 2000 level. For Russia, this means an exceptionally high positive-trade balance averaging $5 billion a month.

This in turn has enabled Russia to keep to its debt payment timetable while avoiding the need for major borrowing. At the same time, Russia's gold reserves continue to grow and have now topped the $30 billion mark – a record far surpassing any past indicators.

GROWTH CONTINUES, BUT SLOWING

But the paradox is that it is continuing high oil prices that constitute the worry for future economic prospects. If oil prices fell, even modest GDP growth of 3.4 percent would be a sign of success. In 1998, for example, when oil prices were low, Russia experienced no economic growth; rather, it had a decline. What we're seeing now is that economic growth is continuing but has slowed down, despite the fact that oil prices, and the Russian trade balance along with them, remain high.

This can mean only one thing – high export prices for raw materials boost Russia's economic growth but are not the main factor driving it. Growth would undoubtedly fall if prices were to slide, but it can also slow down, and is doing so, even without a drop in prices.

In reality, three factors were behind the record growth in 2000, not just the favorable foreign-trade situation. The main factor driving the recovery was the more than fourfold devaluation of the ruble in the months following the 1998 financial crisis. This pushed up the price of imports, making them unable to compete with domestic goods, which took over a larger chunk of the market.

The favorable foreign-trade situation was more of a complementing factor behind growth. The third factor behind growth was artificially low prices and tariffs for products and services of natural monopolies subject to state regulation – fuel and energy and railways.

This third factor had a considerable effect, but is contradictory in nature. In the short term, it helps the consumers of natural monopolies' goods and services, but in the long term it risks undermining these same natural monopolies, which form the backbone of the economy.

WORN-OUT EQUIPMENT

The only moment when these prices for gas, oil and electricity – three times lower than world prices – could be called justified, if at all, was during the period just following the financial crisis of 1998. But keeping prices low comes with the risk of under-investment in the sectors concerned, leading to worn-out equipment, which in turn would cause an energy and transport crisis with disastrous effects for the whole economy.

This slowdown in growth over the last six months while outside factors have stayed the same entails some important conclusions. First, high prices for Russian exports are not enough to ensure sustainable and rapid growth. Of the 16 branches of industry that the state keeps statistics on, only four directly depend on export prices – the fuel industry, ferrous metals, nonferrous metals and the chemicals and petrochemicals industry.

But in 2000, 14 of these 16 sectors saw significant increases in production volumes. Growth in the machine-building industry can be partly explained by orders from the oil and gas industries, but raw-materials export prices weren't what was behind growth in, say, light industry.

In the Soviet era, with its heavily militarized economy, light industry was always the poor cousin. There was never enough investment for light industry; it was technologically backward, and when the Soviet Union collapsed it was left to wither away, the assumption being that Russia would have to buy textiles from Turkey and clothes from China. In return, Russia would sell its oil and what it pompously called "high-technology sector production," or, to put it simply, arms.

But light industry, with production growth of 22 percent, was the record-setter in 2000. Growth in Russian industry overall was 9 percent. As for the fuel industry, which includes the gas, oil and coal sectors, production volumes rose by only 5 percent in 2000. It seems apparent then that high export prices are not the main force driving growth.

Certainly, a drop in oil prices would create problems for the Russian economy, but keeping them high doesn't automatically guarantee rapid economic growth. Devaluation of the ruble drove growth for 18 months, but has exhausted its potential and won't be a major factor in the future. There can be no counting again on such a significant devaluation, after all. What's more, many observers now think the ruble is undervalued in relation to other currencies. This means it will strengthen in real terms at some point or other. In fact, this process is already under way, and about half of the effect produced by the 1998 devaluation has already been lost.

There is no getting away from the fact, anyway, that devaluation brings with it serious negative consequences. For a start, it automatically raises the value of foreign debt, which places an increased burden on the budget, raises the tax burden and puts a dampener on production. Second, the fourfold devaluation led to a doubling of the consumer price index – a movement still under way today, even though devaluation has ended. Wage and pension increases do not keep up with price rises.

Aside from the social consequences (people's real incomes dropped by a third), this has a negative impact on production. There is only limited solvent demand on the domestic market, and Russian semi-finished and finished goods are not yet competitive on foreign markets.

The conclusion is obvious – the three factors behind the record growth in 2000 are temporary and have either exhausted their potential or are losing their effect. There's no hoping they will revive again – unless oil prices rise to a far-fetched $40 or $50 a barrel.

GAIDAR'S REFORMS

The only way to ensure rapid growth is to speed up and see through to their end the market reforms which, ever since Yegor Gaidar left the prime minister's job in 1992, have moved slowly and without consistence. Much discussion has already taken place on the nature and content of these reforms, which are now quite clear. What remains is to make a political choice, something made more complicated by the social problems of the transition period.

Perhaps the most important aspect of reforms concern not the economy itself, but the legal system and administrative practice concerning property rights. It's not just by chance that after a decade of reforms that have transformed the country, Russia still comes among the last places in various international economic-freedom ratings.

It is still difficult to get civil disputes resolved swiftly and fairly in court, especially in property-rights cases. As long as this is the case, it will be hard to attract investment from domestic investors, let alone foreign ones. Meanwhile, despite some decisive statements by President Vladimir Putin, judicial reform hasn't yet begun. There are also no signs of change in administrative practice or attempts to curtail the arbitrariness of the authorities, especially in the regions. Without these steps, investors simply will not have confidence in Russia.

A good illustration of this is the fate of the bill restricting nonresidents' rights to hold shares in Russian media. Foreigners hold only a small share of Russian media outlets, without a particularly large audience.

The bill was the product not so much of real thought and debate as of emotions generated by the prospect that U.S. media magnate Ted Turner might intervene in the battle for ownership of the until-recently genuinely influential opposition NTV channel. The dispute went the government's way and Turner renounced his bid. But the bill stayed on the Duma agenda, taking priority over many other more important issues. If this bill becomes law, it will deal a real blow to Russian media, which are desperately short of investment. But even if it doesn't become law, the fact that the Duma examined it will put investors off, and not just in the media business, as it makes Russian legislators look unpredictable.

Constructive, rather than the destructive, steps taken by the state should concentrate on two main aspects. First, radical decrease of the tax burden on production, and second, ensuring fair competition for all companies.

Just recently, Putin intervened on the social-tax issue – a sore point for businesses. Putin told the economic ministers to bring down the wage threshold at which companies qualify for application of the regressive single social-tax scale. This would provide incentive to companies to legalize their revenues – the full social-tax rate is 35.6 percent of the payroll, while the favorable regressive rate is 20 percent.

This is only one aspect of the tax problem, but it shows that Putin is in touch with what is going on and considers the issue important. But amendments here and there, though important, won't be enough. For investors, a general and radical cut in taxes would be the only decisive step. But the state can allow such tax cuts only if it manages to cut state spending at the same time. This is what gives rise to the tough social and political issues that must be resolved if economic growth is to go ahead.

TWO WAYS TO SAVE

The state can save money in two main areas – defense and social spending; above all, in housing and utilities subsidies. Cutting defense spending would be possible if the war in Chechnya ends and radical military reform, including cutbacks in numbers, goes ahead. Here, there is an obvious political choice to be made.

Housing and utilities reform is a more complicated matter and is the subject of much debate. The chairman of State Construction Committee Gosstroi, Anvar Shamuzafov, said recently that people would never be able to pay the full costs of their apartments. These words come from a government minister, but the government he represents has made housing and utilities reform, including complete liquidation of state subsidies, a key point of its development strategy.

The crucial issue here is how reform will be carried out. Will it be democratic or will it be bureaucratic? The bureaucrat views it all as a matter of raising housing and utility costs to a level that would cover all expenses, and give low-income earners subsidies. This view of reform comes with the slogan: "The rich should pay for the poor," even though everyone knows that no matter how much you take from the rich, it won't be enough to cover all Russia's poor.

Moreover, there are people with medium income levels who wouldn't qualify for any subsidies but who would find the price hikes a real burden. These people make up the majority of homeowners.

A democratic approach to reform would involve not just shifting the cost burden from poorer people to wealthier people, but more importantly, bringing down maintenance costs in general, which are estimated to make up to 40 percent of current costs. This would require de-monopolization of the housing and utilities sector and setting up real competition between housing and maintenance companies. But the Russian local authorities aren't ready to take on this task, and the public is poorly informed about the real issues at stake – another consequence of the authorities' bureaucratic approach to reform.

Creating a level playing field for companies is an issue even more closely linked to social problems. The tricky issue here would be that in removing tax breaks and other privileges, some companies would end up having to either change their business or close shop. It's estimated that a quarter of Russian companies would not be sufficiently competitive to survive if political support were cut off. Changing business or closing altogether would cause a number of social problems, but at the same time, it would free the budget from the burden of having to support them and would give a big boost to economic growth, which would have a positive impact on the social situation.

A POLITICAL CHOICE

The government won't be able to solve all these problems if it sees its tasks as being purely technical in nature. It requires a political choice – including a choice between democratic and bureaucratic approaches to reform.

Until this choice is made, the outlook for the Russian economy is subdued. It's clear that if export prices remain high, Russia will be able to keep up with its debt payments in 2001-02, at least, without moving forward but without slipping back, either. Higher debt payments due in 2003-04 will create new problems, and it's not yet clear how the government plans to deal with them. Even less clear is how Russia plans to deal with unforeseen circumstances on the lines of the 1998 financial crisis should they arise. The Russian economy remains in a state of unstable balance.