Russia 090804 Basic Political Developments

Ruble Gains Most in 2 Weeks on Oil

http://www.themoscowtimes.com/article/1009/42/380123.htm
04 August 2009Bloomberg
The ruble strengthened the most in two weeks against the dollar, and Russian stocks rallied after oil rose above $70 for the first time in a month.

The currency gained as much as 1.9 percent to 31.02 per dollar, snapping four days of declines. The 30-stock MICEX Index, which is made up mostly by energy companies, rose 4.3 percent to 1,098.95, the highest close in seven weeks. Crude oil for September delivery jumped 3.4 percent to $71.84 a barrel in New York.

Oil prices have doubled since February, boosting the earnings outlook for the world’s biggest energy exporter. Russia drained more than a third of its foreign-exchange reserves to help stem a 35 percent devaluation of the ruble from August to January as crude dropped by more than two-thirds.

“With oil at $70, Russian risk perception is positive,” said Ivan Tchakarov, a London-based economist at Nomura Holdings Inc. “The ruble is trading around its fair value. It is finely balanced at the moment.”

Oil climbed to the highest level in a month Monday as factory output in China rose to its highest level in almost a year, while the U.S. manufacturing index showed that conditions in July were the best in 11 months.

The ruble ended the day up 1.7 percent at 31.11 versus the dollar and rose 0.3 percent to 44.53 per euro.

Rosneft added 4.4 percent to 199.22 rubles, its highest close since June 11. LUKoil, the country’s biggest private oil producer, gained 2.4 percent to 1,608.86 rubles, its third day of gains.

Gazprom rose 4.5 percent to 169.53 rubles, its highest level since June 16.

Sberbank climbed 8.7 percent to 46.17 rubles as the ruble strengthened against the dollar. A stronger currency may discourage Russians from withdrawing or converting ruble deposits, Sberbank’s primary means of funding.

Russia’s ‘Unsustainable’ Deficit Threatens Growth, Troika Says

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adYBfDVbt98Q

By Paul Abelsky

Aug. 4 (Bloomberg) -- Russia’s “unsustainable” budget deficit in the next three years is a “major threat to economic stability” and won’t spur economic growth, Troika Dialog said.

“Such fiscal policy leads straight down the path to deadlock,” Moscow-based economists Evgeny Gavrilenkov and Anton Stroutchenevski at Troika, Russia’s oldest investment bank, said in a report today. “Cutting expenditures” and working to balance the budget “remains the most reasonable way out.”

The government last week approved a plan to run a deficit of 7.5 percent of gross domestic product next year to counter the worst economic crisis since Russia defaulted on $40 billion of domestic debt in 1998. This year’s shortfall, the country’s first in a decade, may reach as much as 9.3 percent, according to Finance Minister Alexei Kudrin.

The planned spending this year is almost triple the amount in 2005, Troika said. As a share of GDP, the expenditure is the third biggest among major economies after the U.S. and U.K. and the world’s fifth largest in absolute terms. The outlays will fan inflation and undermine the ruble, according to Troika.

“In contrast with this year, the central bank won’t be able to sterilize excess liquidity from the financial system, reducing the amount of credit given to the banking system,” the report said.

Russia may also fail to borrow almost $20 billion annually in the next three years on favorable terms, Troika said. Sovereign bond yields will probably grow “substantially” as other state-run companies seek to raise funds, according to the report. Higher yields will also boost private borrowing costs.

‘Crowding Out’

“Domestic borrowing could be increased, but again at the cost of crowding out the private sector,” the economists wrote. “The prospect of economic revival appears quite gloomy.”

Russia expects the yield on its first international sale of bonds since the 1998 financial crisis to be about 8 percent, dropping to 7 percent in 2011 and 6 percent in 2012, according to the Finance Ministry. The government wants to narrow the budget gap to 3 percent of GDP by 2012.

The yield on Russia’s 2030 dollar bonds was 7.3 percent yesterday after reaching 10 percent in March.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at [e-mail].

Last Updated: August 4, 2009 02:54 EDT

Putin Opts for a Large Deficit and Small Investment 2010 Budget

http://www.jamestown.org/single/?no_cache=1&tx_ttnews[tt_news]=35350&tx_ttnews[backPid]=7&cHash=df3ca798d9
Publication: Eurasia Daily Monitor Volume: 6 Issue: 148

August 3, 2009 01:59 PM Age: 11 hrs

By: Pavel K. Baev

Prime Minister Vladimir Putin made his cabinet agree on a budget for 2010 that contains few anti-crisis ideas and hardly fits into the directives on stimulating innovations issued by President Dmitry Medvedev. As such, this budget proposal, which will be duly approved by the compliant State Duma in September, is not necessarily a final executive order; for that matter, the 2009 budget as executed now bears little resemblance to the document signed and sealed last fall. Nevertheless, the budget that is finalized now has significance beyond the usual appointment of winners among interest groups. Evgeny Gontmakher, an influential and controversial economist, argued a few months back that the decision on priorities in this budget might decide Russia's fate in no smaller measure than the coup in August 1991 or the financial collapse in August 1998 (Vedomosti, April 22).

Every budget in Putin's "era" contained a 20-25 percent increase of expenditures from the previous year, and the political decision on the 2009 budget was to increase spending still further despite a 35 percent drop in income. That created a deficit that by the latest estimate could reach 9.3 percent of the GDP (RIA-Novosti, July 30). It was clearly impossible to continue the spending spree, so the expenditures in the new budget are "frozen" at the current level, which still makes them some 50 percent higher than the level of income. Consequently, the deficit is planned at the level of 7.5 percent of GDP, which according to Putin is the limit beyond which macro-economic stability could be affected (Kommersant, RBC Daily, July 31). This stability is assured by the "moderately-optimistic" scenario of 1 percent growth in 2010, 2.6 percent in 2011 and 3.8 percent in 2012; these figures are taken as basic guidelines, while the "conservative" scenario predicted zero growth in 2010 and weaker recovery afterwards (Vedomosti, July 13).

The new budget therefore demanded clearer priorities than just small flat cuts in every department and the structure of expenditures proves two propositions about Putin's policy: that he is afraid of the growing discontent within the country and that he has no ideas on revitalizing the economy. Much spin is put on the social orientation of the budget, but where Gontmakher insisted on investing in the quality of human capital while channelling funds into education and health care, Putin has opted for various direct payments, including a 50 percent increase in pensions, aiming at disarming "irresponsible" protesters (Nezavisimaya Gazeta, July 22). It might appear that only cold-hearted economists could argue against helping impoverished pensioners, but in fact the costs of populist measures are very high as investments in infrastructure that create employment and build a foundation for post-crisis modernization are mercilessly cut (www.gazeta.ru, July 29).

One possible way to improve the parameters of the budget was to increase taxation on the gas monopoly Gazprom, but the half-hearted proposal from the Finance Minister Aleksei Kudrin was firmly overruled by Putin after a meeting with Gazprom's CEO Aleksei Miller (www.newsru.com, July 30). This special attention will not only push the budget deeper into the red, it will also necessitate a further 25 percent devaluation of the ruble even if oil prices remain above $60 per barrel and that will keep inflation in the mid-teens (Nezavisimaya Gazeta, July 30). The main source of covering the deficit is the accumulated financial reserves that currently amount to $400 billion. That, however, will not be enough and Kudrin has acknowledged the need to resort to external borrowing that in 2010 could be limited to $18 billion and reach $60 billion by 2012 (www.lenta.ru, July 28). These figures are quite moderate in themselves and the external debt reaching 15-17 percent of GDP is not a heavy burden, but there is also corporate debt, which Kudrin estimates as exceeding $400 billion (RIA-Novosti, July 31). Much of that debt is covered by state guarantees and they are in fact expanding as the government is indirectly involved in negotiations on restructuring loans that have brought such "champions" as aluminum giant Rusal to the brink of bankruptcy.

Entering again into the money market Russia would have to think hard about its credit ratings and reputation - and that implies certain changes in its foreign policy behavior. Indeed, the ability to pay off the external debt was one of the main sources of Putin's confidence in Russia's rising power and his arrogant challenging of Western interests was in no small measure based on the assumption that Russia was free of this humiliating dependency. Now it is necessary once again to bargain with uncharitable international financial institutions, so Moscow would have to contemplate financial consequences every time it feels tempted to offend potential creditors. It might appear that the high level of defense expenditures preserved in the 2010 budget contradicts this as yet barely visible trend towards a more humble foreign policy. However, the deep cuts in the officer corps envisaged by the Defense Minister Anatoly Serdyukov's reform plan are very costly, and such long-standing programs such as the new submarine missile Bulava and the satellite navigation system GLONASS bedeviled by setbacks, must be brought to fruition - again at a very high cost (Nezavisimoe voennoe obozrenie, July 31).

Putin's economic policy, of which the new budget is just one manifestation, is increasingly disappointing for many economists, who argue that if a right measure is taken with a six to nine month delay, it becomes a wrong measure in the context of the deepening recession (www.newsru.com, July 27). The main source of these delays and half-measures is the dilemma that Putin is facing: either to dismantle his system of rigid state control over key economic activities or to focus on rescuing it and condemn Russia to protracted stagnation. He tries to postpone this choice by experimenting with "manual management" of local problems and harvesting PR dividends, but he can hardly fail to see that his orders cannot make credit flow from the banks clogged by bad loans or generate demand for antiquated cars produced by Avtovaz. Nothing in the budget suggests that Putin has recognized the imperative of scrapping his model of "command petro-economy," and that most likely means that long hours of reconciling intake and disbursement were wasted because someone else would have to take responsibility.