Russian economy should not be overcooled, VAT hike will balance budget and monetary policy - Putin

SOCHI. Oct 3 (Interfax) - The main objective for the Russian economy is diversification and increasing productivity, but now a forced cooling is underway that must not over-chill it, President Vladimir Putin said at a meeting of the Valdai International Discussion Club.

He said a planned value-added tax (VAT) hike of 2 percentage points will make it possible to find a balance between budget spending and the interests of monetary policy, but it should not trigger growth of the shadow sector of the economy.

"The main issue now is further diversification of our economy. We must make it more modern, even more high-tech. We must change the structure of the labor market, the structure of pay on this market. We must increase labor productivity, which means highly skilled professionals should [earn a] higher wage," Putin said.

"Secondly, we must pay attention to people with low incomes...People with low incomes, when they earn more they spend money, foremost on the products that are made in the country itself, and this means the internal market grows," he said.

"We must without a doubt further strengthen our financial system. And here it's very important to achieve two things. Firstly, we need to further strengthen macroeconomic stability and reduce inflation, but at the same time also try to maintain positive rates of economic growth," Putin said, recalling that the Russian economy grew by more than 4% per year in 2023 and 2024.

"But back at the end of last year we said, yes, in order to fight inflation we must sacrifice such record growth rates. And the Central Bank raised the key rate, which, of course, affects the economy as a whole. I hope that this will not over-chill the economy," Putin said.

"But we will carry out measures related to the forced cooling, we will sacrifice these growth rates for the sake of restoring macroeconomic indicators that are extremely important for the health of the economy itself in general," he added.

"The decisions made by the government in the area of taxation, the increase of the VAT by 2 percentage points are already known. And here it's very important that we don't have the size and scale of the shadow economy grow," Putin said.

The decision to raise the VAT will "certainly also have an impact on economic growth, we realize this, this is an increase in the tax burden after all, it will have an impact on the economy," but on the other hand "this will make it possible to find a better balance for both the Central Bank in making decisions on macroeconomic issues related to the key rate, and the government on budget expenditures, and rein in the main parameters and create conditions for future development," Putin said.

"All this together, a) gives us reason to believe that we have passed the very difficult stage, b) gives us confidence that we have not only passed this stage, but we have every reason and every possibility to proceed further. I'm confident that is what will happen," Putin said.