Prime Minister Vladimir Putin, the leader of the pro-Kremlin United Russia party, said at the party’s recent 10th congress that the implementation of the government’s Strategy 2020 development programme was beginning in an extremely difficult situation. Indeed, a crisis is like a natural disaster – unavoidable. Although Russia was better prepared for it than many other countries, the globalisation of the world’s economy, into which Russia is integrated, is making the effects of the crisis in Russia more painful.
The government took stabilisation measures at the first signs of the crisis. Unfortunately, they were formulated in the spirit of the US Federal Reserve, and so have not had the desired effect. Like the Fed, the Russian government injected liquidity into the economy, above all into banks. It allocated 1.7 trillion roubles ($54.7 billion) for this purpose. The first stimulus package adopted in September to refinance Russian companies’ foreign loans cost the treasury over $200 billion.
In late October, the government started transferring funds to the largest banks, mostly in the form of short-term loans, an unpopular measure at the time of a crisis. The banks acted as it suited them best. The government had not anticipated that many banks would convert cheap government resources into foreign currency, thereby aggravating the financial problems.
Moreover, private banks deposited the converted roubles with banks abroad, while other banks used the funds to buy out their debts through intermediaries. Despite spending on intermediaries, this is a risk-free and highly profitable operation, because debts are being sold at 50% or even 30% of their nominal value.
As a result, capital flight from Russia and the CIS reached $55.8 billion between November 12 and 19. Sergei Ignatyev, head of the Russian Central Bank, said capital flight had soared to frightful amounts by October 2008, with as much as $50 billion exported from the country over the month. The total figure for August and September was $33 billion, while the country’s international reserves plunged by $72.2 billion.
The country’s Deposit Insurance Agency (DIA) has assessed withdrawals from Russian banks in October at 5%-7% of the total. Government support to banks will cost much more than initially anticipated. The state-owned development bank Vnesheconombank (VEB) spent $46 billion on assistance to banks in October. What if they don’t repay the loans? Volatility on the Russian stock exchanges is also alarming. Analysts say it may encourage foreign rating agencies to lower Russia’s sovereign rating and cause remaining foreign investors to flee from the country.
The Central Bank head said this might weaken the rouble, but it has already weakened the leading sectors of the Russian economy, including the defence industry, which has not received nearly $30 billion of the promised allocations.
Once prosperous sectors are tottering, as evidenced by some banks’ decisions not to grant loans to workers of engineering, construction and steel companies, which are laying off personnel.
To remedy the situation, the government has drafted, on instructions from President Dmitry Medvedev, an action plan to stabilise the financial and real-economy sectors. The 55-point plan is designed for five months, until April 2009, and provides for assistance to the financial and banking sectors as well as outlining efforts to support domestic demand and the social sphere.
Government assistance is guaranteed to the banking sector, agriculture, housing construction, automobile manufacturing, defence, commodities and transport sectors as well as small businesses. There are problems with mortgage loans in Russia, although they are not as catastrophic as in the United States. Therefore, the government plan provides for increased refinancing of mortgage loans in 2008 through the Agency for Housing Mortgage Lending. The government will also buy economy-class housing in 2008-2009, including projects that are almost completed.
The plunge in oil prices has forced the Russian government to announce a possible correction of the oil export duty. President Medvedev proposed that oil export contracts be settled not in US dollars but in roubles. Subsidies to the interest rate on some kinds of loans taken out by agribusinesses in 2008-2009 will amount to 100% of the Central Bank’s refinance rate. The Central Bank may also finance large agribusinesses.
The government will increase financial assistance to small and medium-sized businesses (SMEs). By early November, SMEs had received almost $10 billion in loans, which the government hopes will soon be repaid.
Putin announced new measures to support the economy and increase social payments at the United Russia congress. In 2009, the wage fund for public-sector workers will be increased by one-third, and the average labour pension will rise nearly 50% by 2010.
At the same time, the government will correct tax policy to support the business sector. A 4% reduction of the profit tax will allow the sector to keep over 400 billion roubles ($14.5 billion, or €11.5 billion), while an increase in the amortisation premium by one-third will allow companies to accumulate funds for modernisation. The profit tax will be calculated on the basis of real income, not on the basis of data for the first quarter. Regions will be able to lower taxes on SMEs from 15% to 5%, and the government also expects the regions to tackle social projects.
Overall, reduced taxes will give 400-500 billion roubles ($15-$18.5 billion) of additional funds to business. Assistance to the agricultural sector has been increased dramatically.
Finance Minister Alexei Kudrin said in the lower house of parliament in late November 2008 that the government might use over 500 billion roubles ($18.5 billion) from the Reserve Fund for dealing with the consequences of the financial crisis. He did not rule out that the Reserve Fund might allocate money for supporting the regions next year.
As of November 17, 2008, the Reserve Fund stood at 3.588 trillion roubles ($131.26 billion) and the National Welfare Fund at 1.672 trillion roubles ($61.16 billion). Since early 2008, when the Stabilisation Fund was split into the Reserve Fund and the National Welfare Fund, profits from the placement of theirmonies totalled $6 billion. If we spend 500 billion roubles annually, the funds will suffice for at least seven years, Kudrin said.
Such injections were bound to spur inflation, which is nevertheless not expected to exceed 14% this year. Some Russian and foreign analysts agree that the injection of funds into the Russian economy will not spur inflation excessively, but will serve as a compensating factor.
The government does not think the rouble will have to be devalued, and recommends that people save their money in roubles, including with Russian banks. At the same time, the Central Bank decided to punish creditors by increasing the refinance rate by 1 percentage point, to 12% annually. The measure shocked market players, because previous moves by the government and Finance Ministry were aimed at improving loan accessibility.
The Central Bank claims the reduction of the rouble rate and the increase of the refinance rate were necessary to halt the outflow of capital from Russia (minimum $ 100 billion in 2008). Analysts say the decision to raise the refinance rate runs contrary to previous initiatives and to global practice, and that other central banks have been lowering their refinance rates. It would be more logical to raise the rate when Russia reaches the bottom of the crisis and government allocations reach ailing companies, they say. So far, it is not clear if the crisis has touched bottom, because the stock market is still volatile, companies are announcing production and personnel cuts, and banks are pleading for government assistance.
Production was on a downward trend by the end of 2008. The World Bank predicted in its Russian Economic Report published in November that the unemployment rate would hit 5.9% by the end of the year. The bank’s analysts expect peak layoffs in January-February 2009.
But Russian companies started dismissing workers long before that. According to the Federal State Statistics Service (Rosstat), the unemployment rate soared by 8.7% in October and individual take-home income dwindled by 0.5% against September.
In other words, Russia has not stopped the “creeping crisis.” The World Bank’s report said the Russian economy would start to recover no sooner than in late 2009. Its growth will slow to 3% in 2009 from 8% in 2008, and the number of poor and unemployed will grow dramatically.
The beginning of economic revival will depend on oil prices. If they rise to $70 per barrel, Russia will follow the World Bank’s scenario. But if they slump to $40, recession in Russia will be longer, and it will not emerge from the crisis before the industrialised countries do so.
Finance Minister Kudrin is more optimistic. He believes that Russia’s gold and foreign currency reserves “show that we have a reliable basis for macroeconomic stability and a stable exchange rate for the national currency.” Unfortunately, Russia has not always developed according to the market laws which Kudrin cites. And it is not by chance that President Medvedev has asked: "Why is it that oil prices have plunged to one-third, while petrol prices have remained almost the same in Russia?” So, despite official optimism, Russians are cutting spending and saving money for a rainy day. Society has a pessimistic view of the future, as evidenced by the publication of their expectations in the Trud daily, titled, “A revolution, suspended production, and poverty: Russians’ view of the outcome of the crisis.” God forbid that this will indeed be so.
