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Russian Stimulus Plan ‘Just Talk’

Russia is ready to institute a $35 billion “anti-crisis” stimulus plan intended to rescue an economy crippled by plummeting oil prices and Western sanctions by increasing spending on agricultural and social programs while cutting most other spending by 10 percent this year. Defense and social spending would not be touched.

At the core of the plan is shoring up banks and big companies – mostly energy concerns – to keep them from collapsing until the crisis has eased, and to increase pension payments to match inflation. These initiatives would be paid for by reductions in spending for long-term government programs, though the Kremlin gave few details of these cuts.

At most, the Kremlin website explained that government spending will be cut by 10 percent in 2015 and at least 5 percent annually over the next two years in an effort to achieve a balanced budget by 2017. Meanwhile, the Finance and Economy ministries will begin work on setting up a “bad bank” to accept, manage and isolate poorly performing assets from the rest of the country’s banking sector. Related: Russia And China’s Growing Energy Relationship

Finance Minister Anton Siluanov said Jan. 27 that the stimulus program wouldn’t increase budget expenditures because of spending cuts elsewhere and contributions from government reserves. But the next day he gave parliament a grimmer assessment. “There won’t be a fast recovery in oil prices like there was in 2008-2009,” he said. “This will be a long-term situation.”

As for the bailout of banks, the plan is nothing new. Under it, the government will provide $27.8 billion to help them survive the current crisis, as announced a year ago. But since then, many analysts have concluded that the banks will need far more money to prevent collapse.

“This plan is something like a cushion to avoid a rapid deterioration in Russia and support several of the most important economic agents [and provide] social support,” Yulia Tseplaeva, the chief economist at Moscow’s Sberbank, told Reuters.

In fact, the support for these social programs was personally ordered by President Vladimir Putin, along with a demand that defense spending and debt repayment be left untouched.

The vagueness of exactly how Russia plans to finance the stimulus plan is understandable because the Kremlin has not yet updated its budget and other economic forecasts for 2015, according to Ivan Tchakarov, an economist at Citibank who specializes in Russia. Related: Russian Gas Provides Lifeline To Chinese Expansion

For example, Tchakarov said, some of the financing is expected to come from the National Wealth Fund, an $80 billion trust originally created to finance infrastructure projects. Other than that, though, he said, “It’s a typical government-led program. It focuses on subsidies. I haven’t seen any particular measure that strikes me as a structural reform, it’s just talk.”

Russia is the world’s largest single energy exporter, without much in the way of other commodities to trade, and as a result its economy has been badly damaged by the steep plunge in oil prices since June 2014. Further, the European Union and the United States have imposed crippling economic sanctions on Moscow over its support for pro-Russian separatists in neighboring Ukraine.

The country is so bad off that First Deputy Prime Minister Igor Shuvalov said Jan. 23 at the World Economic Forum in Davos, Switzerland, that it is in worse shape than it was at the onset of the global financial crisis in 2008.

By Andy Tully of Oilprice.com

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Leave a comment
  • willie on January 29 2015 said:
    "The country is so bad off that First Deputy Prime Minister Igor Shuvalov said Jan. 23 at the World Economic Forum in Davos, Switzerland, that it is in worse shape than it was at the onset of the global financial crisis in 2008."

    Are you sure he wasn't talking about the USA, Andy?

    Might as well just lay it on with a trowel.
  • Ondoron on February 01 2015 said:
    Just wishful thinking...

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