November 30, 2011 / 12:31 PM / 8 years ago

Russia primes pump to resist global crisis

MOSCOW (Reuters) - As the first of two elections draws near, Russia is going all out to shield the economy against a possible global slump by increasing spending, lending freely to cash-strapped banks and aiding its closest neighbours.

Prime Minister Vladimir Putin has ordered a hefty fiscal stimulus to tide him over from Sunday’s parliamentary election, which his United Russia party is expected to win, until his expected victory in a presidential election next March.

But this expansive mix creates a number of hostages to fortune, above all a dependence on rising oil prices to sustain Russia’s economic model, and Moscow may yet rue its reluctance to engage in efforts to aid the crisis-hit euro zone.

Instead, Putin is building ties with Russia’s post-Soviet neighbours by upgrading a regional free-trade zone into a deeper ‘Eurasian Union’ and granting aid to hard-up Belarus.

Moscow has shown less inclination to dip into its half a trillion dollars in foreign reserves to help the euro zone through its sovereign debt crisis - but Europe could be where Russia’s vital economic interests lie.

The European Union was the destination for nearly half of Russia’s $600 billion in exports in the first nine months of the year - chiefly oil and gas - while the post-Soviet Commonwealth of Independent States accounts for a bare sixth.

“The leadership should acknowledge that there is something serious going on with economic growth globally and that this may affect us,” said Ivan Tchakarov, chief economist at Renaissance Capital, a Moscow-based emerging markets investment bank.

“To be honest, I’m not sure that this is the case.”


For the time being, Russia’s $1.9 trillion economy is doing relatively well. It should grow by about 4 percent this year, recouping the loss in output it has suffered in real terms since the 2008 slump.

Consumer demand is holding up and, even though banks face funding strains, credit is growing at a rate of 25 percent, lagging only Turkey among emerging markets in Europe, the Middle East and Africa.

But on the supply side things do not look so rosy -- growth in industrial production has weakened to its slowest since September 2009. Stocks .IRTS, seen as a leading indicator for economic activity, have shed 30 percent since April.

Private sector economists are marking their growth forecasts for 2012 down to between 2 and 3 percent, below an official estimate of 3.7 percent - even though the government will hike nominal spending by 15 percent next year, including a trebling of military pay, pushing the budget from modest surplus into deficit.


Oil markets have yet to react to signs that Europe is heading for recession, with prices above $110 a barrel on Tuesday.

But “the bare fact is that Russia is now going to need an oil price of close to $120 per barrel to balance its budget next year — that’s up from $40-45 five years ago,” said Neil Shearing of Capital Economics in London.

“When the crisis hit in 2008-09 there were problems in the corporate sector with high levels of external debt. Now those vulnerabilities are smaller, but the ability of the government to come to the rescue is much more constrained.”

A fall in the oil price to $60 for two years, coupled with a global deceleration, would however not lead to a slump comparable to Russia’s 8 percent economic contraction in 2009, argues Alexey Devyatov, chief economist at UralSib bank.

“This is a kind of stress test for Russia, and if this happens we would see a mild recession,” said Devyatov.

Russia’s strong balance sheet, with a sovereign debt of just 10 percent of GDP, provides a fiscal cushion. But, based on oil at $60, the budget deficit would widen to over 5 percent of GDP in 2012 and stay high, officials estimate.


The central bank is meanwhile concerned that banks — in particular subsidiaries of vulnerable European players — are lending too much money to their parents.

Banks’ net foreign assets grew by $12 billion in October to $53 billion, leading the central bank to call in chief executives to warn them that access to central bank funding could be restricted for the worst offenders.

Banking sector outflows are just part of a broader phenomenon of capital flight that is likely to exceed official forecasts of $70 billion this year and, to a large extent, reflects a loss of confidence in Russia’s economic leadership.

That in turn acts as a constraint on the central bank’s ability to reduce interest rates, although RenCap’s Tchakarov still sees room for policy easing in the coming months, saying an increasingly disinflationary global environment offsets the upward pressure on import prices from the rouble’s 12 percent depreciation against the dollar since July.


With no clarity on the shape of Russia’s next government, to be led by Dmitry Medvedev who will swap jobs with Putin after four years as president, economic policy is expected to stay on hold until after Putin is sworn in next May.

“The strategy for the next six months is to keep the ship anchored, pointed into the waves and to ride them,” said Chris Weafer, chief strategist at brokerage Troika Dialog.

“I don’t think we are going to have any quick responses by the government to external events. It will be reactive rather than proactive.”

That means any shift from Russia’s flagging consumption-led model to a more dynamic, investment-driven growth path will have to wait until the political transition is complete.

“There needs to be a shift in balance towards investment-led growth,” said Shearing of Capital Economics, highlighting Russia’s poor investment climate and weak property rights as key challenges.

“You could go to town on some of the issues that dog Russia’s image. But you don’t get those kind of economic changes without political changes first.”

That is unlikely, said Sergey Aleksashenko, director of macroeconomic studies at Moscow’s Higher School of Economics and a former senior finance ministry and central bank official.

“We will live just as we do now — the ruling party will not change, nor will the people running the country,” he said. “Even if you assume that new people come along and try to wean Russia off its resource dependency, it would take 10-15 years.”

Additional reporting by Darya Korsunskaya, Editing by Timothy Heritage/Ruth Pitchford

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