Russia backs economic stimulus package

MOSCOW Thu Jul 25, 2013 2:01pm BST

MOSCOW (Reuters) - The Russian cabinet approved measures on Thursday aimed at reviving a lackluster economy, including steps to invest in infrastructure and help small business.

President Vladimir Putin had called for the package. Russia's economy grew by just 1.6 percent in the first quarter, prompting intense policy debates.

Analysts said that while the latest stimulus measures were needed, they will do little to address longstanding problems - especially a notoriously poor investment climate - that are weighing on Russia's long-term growth potential.

"It's basically an effort to do a quick fix to prevent the economy from sliding into stagnation, rather than addressing structural long-term issues," said Alexander Morozov, chief Russia economist at HSBC.

The measures largely involve tapping money set aside in the National Welfare Fund, presently worth $86.5 billion and one of two sovereign funds that accumulate revenues from oil taxes.

The steps include using more of this fund to invest in infrastructure projects, as well as to support existing small-business lending programs managed by the state development bank Vnesheconombank (VEB).

President Vladimir Putin said in June Russia will plough 450 billion roubles ($14 billion) into major infrastructure projects - including a rail link spanning the world's largest country.

However, the government on Thursday did not release additional figures on its stimulus steps, with many details still to be finalized. A list of infrastructure projects to be financed will be drawn up by December, according to Russian media.

POLICY DIVISIONS

Spending the National Welfare Fund - originally designated to support the overburdened state pension system - has caused policy divisions within the government.

While the growth-oriented Economy Ministry has backed greater state spending to boost growth, the fiscally conservative Finance Ministry has been cautious.

However, the gaps between Russia's policymakers appear to be narrowing. Presenting the government's plan on Thursday, Economy Minister Alexei Ulyukayev, until recently deputy chairman of the central bank, said that fiscal and monetary stimulus measures are now justified because the economy is underperforming.

"A certain (negative) gap between the actual volume of production and the potential has appeared and we have the possibility to use monetary and fiscal stimulus," he said.

Seen as an anti-inflationary "hawk" in his previous job at the central bank, Ulyukayev has said in the past that such stimulus measures would be counterproductive.

Other steps unveiled on Thursday include extending tax breaks for small business, and new laws on securitization designed to ease lending to small businesses.

While leaving its key interest rates on hold, Russia's central bank has already taken steps designed to boost lending, creating a new mechanism for medium-term refinancing of banks that will lower banks' funding costs.

The government on Thursday also reiterated existing plans to reduce the bureaucratic burden on business and to discourage Russian companies from operating offshore, but added few details.

"Much more needs to be done in order to move from short-term stimulation of the economy to more sustainable long-term economic growth," HSBC's Morozov said.

(Reporting by Darya Korsunskaya, writing by Jason Bush; Editing by Ruth Pitchford)