Crisis in Russia. Overview. 16-23.02.2009

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In 2008, Russia’s industrial production went down by 16%, the most serious drop since 1994. According to Rosstat, a government statistics agency, these cuts in production affected practically all industrial branches, except for agriculture, food industry, and some segments of machine-tool building. Meanwhile, the local automotive and engineering industries set an anti-record: in January 2009, local car production decreased by 79.7%, bus production decreased by 83.3%, truck production decreased by 74.4%, and tractor production decreased by 91.1% as compared to January 2008. Due to that situation, the Russian Economic Development Ministry had to downgrade the country’s social economic development forecasts for 2009. According to Ministry experts, the 2009 industrial production will go down by 7.4% except for the previously expected drop of 5.7%, while the GDP will go down by 2.2% instead of the previously expected drop of 0.2%. However, industry experts are more optimistic in their forecasts than governmental agencies. According to VTB Capital, in 2009 the GDP will drop by 1.6%, while the oil price will amount to USD 55 per barrel. According to Alfa-Capital, in 2009 the local industrial production will go down by 6%.

Economists believe that the above government forecasts are based on their analysis of the December 2008-January 2009 trends, when local industries demonstrated poor economic results. However, there are exceptions to the general trend of a decreasing production volume. Though the local car production reached its bottom in January, it is expected that partially due to government support this industry’s production volume will soon increase. The ruble devaluation and revised structure of customer expenses will help increase the food industry production.

In its review of the Russian economy, the S&P international rating agency focused on the new trend of re-nationalization. “While in the 1990s, local oligarchs provided loans to the state at lowest possible interest rates guaranteed with the country’s key assets, currently those assets have been passed to the state as mortgage loans with certain elements of control on the part of the state”, S&P claims. “Nornickel and Sistema-Gals are examples of such assets. It is likely that the state is not so much interested in its ownership of these assets, as its influence and control opportunities”.

According to Moscow Mayor Yury Luzhkov, it is urgent to nationalize a number of the Russian economy branches, to improve their financial and, if possible, technological state, and then to put them out to tender.

In the Financial Stability Review of 2008 published on February 17th, 2009, the Bank of Russia reported “the banking sector’s reduced stability”. Recently the number of potentially problematic Russian banks has increased by 200%, and currently amounts to 150 such banks. As they will hardly get state support, it is very likely that they will lose their liquidity and disappear from the market.

It is expected that foreign exchange bonds issued by Vnesheconombank will help decrease tension at Russia’s foreign exchange market. Russian banks can use them as bail bonds for refinancing purposes at the Central Bank of Russia. Plans call for the launch of Vneshtorgbank foreign exchange bonds to the market in the end of February 2009. Presumably, banks that have been purchasing foreign currency during the past two months, will invest it in those bonds. And those bonds will appear rather cheap for those banks.

Meanwhile the State Duma has been considering an option of opening access to the Russian market of foreign financial credit instruments. A corresponding draft law was passed in two hearings, and it is expected that it will be adopted in the near future. It boils down to providing a liberal access of foreign quality financial instruments, but setting a more complicated mechanism of access of foreign currency bonds that are more risky to the Russian financial market.

On Wednesday, February 18th, 2009, Financial Minister Alexey Kudrin presented parameters of the 2009 amended budget to members of the Supreme Council Bureau of the ‘United Russia’ party. According to Minister Kudrin, the budget’s expenses have been increased by 558.6 bln rubles. As compared to pre-crisis budgets, the current document’s deficit must not exceed 8% of the GDP, so that the country would have sufficient funds to live through the three upcoming years, as budgets of 2010 and 2011 are also the deficit ones. However, as additional anti-crisis expenses are included in the new draft, and they will amount to 25.7% of all expenses, the already adopted expenses must be cut by 1,900 bln rubles. The 2009 budget is based on the supposition that the price of oil be USD 41 per barrel. According to Financial Ministry experts, if an average annual oil price decreases by USD 5 per barrel, the budget deficit increases by 0.8% of the GDP. The new amended budget is based on a new social economic forecast of the GDP drop by 2.2% provided by the Russian Economic Development Ministry. In nominal terms, the GDP may amount to 40,400 bln rubles.

Plans call for the government channeling some 2,460 bln rubles to the national economy, including 300 bln rubles to the banking system, 385.3 bln rubles to non-budget funds, 325 bln rubles to the finance market, national economy industries, and labor market, and 300 bln rubles to Russia’s regions. Specifically, 50 bln rubles will be transferred to the Russian Railways company, and the military and industrial complex, while 35 bln rubles will be allocated for improving housing conditions for veterans.

Higher inflation and cheaper ruble give rise to additional budget expenses of 91.1 bln rubles to support indexation of welfare benefits and service the foreign debt. Vneshekonombank’s national welfare fund deposits are also considered additional expenses. Finally, the Financial Ministry keeps 200 bln rubles as an emergency fund.

The budget will save funds on state investments, a total of 196.5 bln rubles including the Investment Fund. Additionally, some 476.8 bln rubles will be gained from the 15% budget sequester that was announced last December. However, the government has ordered to introduce a 15%-cut in budget expenses of all ministries and agencies, except for courts (the Energy Ministry – by 33%, the Transportation Ministry – by 30%, the Education Ministry – by 11%, the State Duma – by 12%, and the Foreign Ministry – by 12%). It is expected that this measure will help save an additional of 900 bln rubles.

To decrease the scale of budget expenses’ cuts, the Financial Ministry expects to order the reimbursement of a total of 245 bln rubles to the income part of the state budget from various sources. They are 80 bln rubles that Russian regions received as subventions and subsidies, but not spent in 2008, and 165 bln rubles received but not spent by the Rosnanotekh and public utilities state corporations.

It is expected that revised deadlines for putting into effect new energy facilities will help save a total of 1,000 bln rubles. The new all-Russian electrification plan conceived by Anatoly Chubais, the main ideologist of the Russian power energy reform, will be significantly cut. According to Energy Ministry forecasts, within the upcoming five years the number of new power energy facilities put into effect in line with the General Plan for Power Energy Facilities Development up until 2020 will decreased twofold or even threefold. Due to the ongoing crisis, power energy consumption has been decreasing, while power producers are lacking sufficient funds to support their investment programs.

According to Rosstat, in January 2009, net prices for products set by producers decreased by 2.7%, a slowdown after a dramatic drop in net prices of 7.6% last December. Economists believe that this slowdown in net price rating cannot be viewed as stable. They claim that is due to the recent drop in raw material costs price in global markets, and it can be viewed as start of the process of replacing imported goods with local ones. Experts from the Transitional Period Economy Institute also confirm increased demand for domestic industrial products in January-February 2009. They conducted an opinion poll among over 1,000 managers of Russian enterprises and concluded that the index of anticipated industrial optimism increased in Russia almost by 4.5 points in February 2009 as compared to January 2009.

On February 18th, 2009, Tatiana Golikova, Health Care and Social Development Minister, made a report on the status of Russia’s labor market to State Duma deputies. According to Minister Golikova, there are 5.8 mln unemployed in Russia calculated based on the International Labor Organization criteria. They are potentially active people, who have no profitable occupation and have been actively looking for such an occupation”. The total number of unemployed registered at local labor exchange offices is 1.8 mln people, an increase by 1.1 mln people within the past five months. The unemployment situation has dramatically deteriorated in Chelyabinsk, Nizhny Novgorod, Tver, Vologda, Sverdlovsk, and Vladimir regions.

On February 15th, 2009, President Dmitry Medvedev launched a line of interviews aired by all-nation TV channels, in which he focuses on Russian authorities’ anti-crisis activities. Specifically, President Medvedev noted that some regions cannot cope with increasing unemployment. As a result, he decided to replace several governors. In Voronezh region former agriculture minister Alexey Gordeev took up from Vladimir Kulakov. In Orel region former deputy agricultural minister Alexander Kozlov replaced Yegor Stroev. Igor Fedorov from Arkhangelsk region will manage Nenetsky autonomous area instead of Valery Potapenko, while Andrey Turchak, senator from Pskov region, replaced Mikhail Kuznetsov.

Experts doubt that replacement of governors will help fight unemployment and unpaid salaries. Under crisis, a strong governor is the one who will ban any public demonstration of opposition, or will avert public reports of conflicts within the local elite.

According to experts from the Globalization and Social Movements Institute, in Russia due to the ongoing economic crisis objective conditions for a rapid emergence of politically minded youth have formed. So far nationalistic ideas are most popular with the youth, but leftists’ ideas also have good prospects. Experts predict rapid formation of quite new political organizations of young people in Russia that would oppose both the current authorities and the current opposition to the authorities.

Meanwhile, the manpower of various force structures designed to oppose internal challenges is 2.5 mln people, which is more than the consolidated manpower of Russia’s regular armed forces.

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