ussian economy shrinks, firms told fight for funds.

By Peter Henderson

MOSCOW, July 15 (97) - Bright forecasts of Russian economic growth were proven hasty on Tuesday when official figures showed the economy was still shrinking and a leading reformer said companies must fight for foreign cash.

" We have to get used to the fact that the battle for foreign investment is always tough and at times completely without rules," Interfax news agency quoted minister without portfolio Yevgenny Yasin as telling an investment forum.

Russia's efforts to attract foreign funds to jump start growth have so far not turned around the economy, which the State Statistics Committee said on Tuesday had shrunk 0.2 percent in the first half of the year compared to 1996.

The news undermined Prime Minister Viktor Chernomyrdin's triumphant announcement on July 2 that gross domestic product (GDP), or national output, had grown one percent in six months, reversing a 39 percent decline since 1991.

"The decline has stopped," President Boris Yeltsin chimed in two days later.

But Tuesday's sobering figures contained signs of hope.

GDP in June alone was unchanged on a year ago, a possible sign that growth is around the corner, and unemployment edged down for the first time in six months by 70,000 people to 6.9 million people, or 9.5 percent of the workforce.

Industrial production rose 0.8 percent in the first six months of the year on a year ago to 761 trillion roubles ($131.8 billion) and the foreign trade surplus widened to $11.0 billion in the first five months of this year from $6.8 billion in the first half of 1996.

Foreigners are drowning the stock market with funds, pouring in more than $1 billion over the last month alone, some traders say, and sending stocks and domestic bond prices nudging all time highs.

But direct investment into factories is critically low. Finance Ministry economist Viktoria Kotova, part of the ministry's expert group, recently estimated 1997 direct foreign investment would be a paltry $2.7 billion.

"Despite certain progress by Russia in this area, our competitors, including Eastern Europe, have gone farther and offer investors more preferable conditions," Yasin said.

One of Russia's strongest achievements, lauded by investors and envied by other developing nations, is its fight with inflation which was 1.1 percent in June after 0.9 percent in May. It was over 1,000 percent annualised during parts of 1993.

Russian industrial prices, which offer a taste of consumer inflation around the corner, when manufactured goods are finally sold, rose by 0.9 percent in June, almost double May's 0.5 percent rise.

Russia's monetary stability may look even better if a few zeros are lopped off the rouble, which trades at almost 6,000 to the dollar but was worth more than a dollar a decade ago.

Central bankers are considering other countries' approach to redenominating currency, Prime-Tass news agency quoted bank Chairman Sergei Dubinin as telling journalists.

But Russians who hold as much as $20 billion cash in U.S. bills, distrust their own currency, and Dubinin said any such cosmetic move would be careful and fair to all.

"If redenomination is considered expedient, then the currency exchange will take place at the same rate for all holders," he promised.