Russia Should Be Prepared For New Economic Crisis, Says Putin

By Vlad Grinkevich

President Vladimir Putin has called for a tougher budget which would be more effective in terms of expenditure and less dependent on market fluctuations.

As he delivered his budget message on Thursday, President Putin urged the government to set aside funds for anti-crisis measures and carry out economic reforms. Experts fear, however, that the authorities will find it more than challenging to devise anti-crisis measures, ensure the country’s economic development, and implement previously made commitments amid the continuing deterioration of the situation on the world markets. The Voice of Russia’s Vlad Grinkevich reports.

In his budget message Vladimir Putin said that the budget’s dependence on the situation on the raw materials markets hampers Russia’s economic development and makes it defenseless in the face of external threats.

“Markets have become volatile amid huge oil and gas shortages. Given the situation, Russia should meet the challenge of stimulating economic growth, pursuing sweeping social reforms, and protecting the budget against sharp fluctuations in oil and gas prices.”

Yevgeny Nadorshin of AFK Systema comments: “The government has called for similar measures before and has been trying to meet these goals for several years. But even though the government has made headway in this direction, it is far from enough to meet the set targets.”

In the opinion of Yevgeny Nadorshin, the president’s message lacks the quantitative and time-related criteria for establishing what has been done and set the deadlines for achieving other objectives. According to FBK analyst Igor Nikolayev, reassessment of economic targets is particularly relevant now that Russia and the world have found themselves on the threshold of a new crisis, far worse than the 2008 meltdown.

“Unlike in 2008, when we saw a rapid drop and a sharp rebound, now we won’t get out of it that easily – we’ll have to carry out structural reforms and change the economic model.”

In 2008, both Russia and the West chose not to reform their economies. Instead, they resolved to protect their economies through hefty financial injections. Thanks to accumulated resources, Russia survived the crisis in a better condition compared to other countries. Now that the government is preparing a new “safety cushion”, President Putin has suggested a budgetary rule which would concern oil prices stipulated by the budget and oil export revenues.

“The budget will not be formed on the basis of the current oil prices, or even on the basis of the ones predicted for the future. It will be created on the basis of the five-year average with an annual accounting period to be increased by one year. As a result, 5 years from now, Russia’s budget will be formed on the basis of the average oil price for a ten-year period.”

As for oil and gas revenues, if the effective oil price is higher than the reference price, excess revenues will be channeled to the Reserve Fund or will be used to replace sources of financing the budget deficit. If the price turns out to be lower than the reference price, the resources from the Reserve Fund will be used to cover the budget deficit. This should see the government through in case of a worsening situation on the market. Yevgeny Nadorshin believes, however, that this kind of strategy could undermine the government’s efforts in reforming the economy.

“Under the current regulation, financing of infrastructure and other additional expenditures can go ahead only after the implementation of the basic part of the budget and the replenishment of the Reserve Fund. If oil prices don’t go up, there will be no funds left for this.”

Pinning hopes on a rise in oil prices makes no sense. Fully aware of this, the government plans the 2013 budget proceeding from an average oil price of $90 per barrel. In this case, budget expenditures are reduced by more than 2 trillion rubles. Igor Nikolayev fears that the Russian authorities will have to choose between economic development and the implementation of earlier made social and budgetary commitments.

The government’s chances of keeping its commitments to embark on economic reforms become clear from priority development programs which were presented by President Putin in his budget message. As for specific steps to pursue these programs, they will be presented at the beginning of 2013.