Russians told to tighten belts as economy set to shrink 5%

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With no end in sight to a slump in oil prices that halved the rouble’s value against the dollar last year, Russia has urged its people to tighten their belts. With inflation at 12.5 per cent, state and private companies are warning of likely job cuts, and the country’s economy is predicted to shrink by up to 5 per cent in 2015.

The government unveiled a crisis plan to cut state spending by 10 per cent this year and 5 per cent in 2016, while freezing most major state-funded construction projects. “There won’t be a fast recovery in oil prices like there was in 2008-2009,” finance minister Anton Siluanov said this week.

He said Russians and their economy “will have to adapt to new conditions” and accept the $100-per-barrel oil upon which the national budget has been based for several years was a thing of the past. “We will carry out a reasonable budget policy and see our goal as reaching a no-deficit budget by 2017, with oil price predicted at $70 a barrel,” Siluanov said.

Putin and his allies are not expecting Russians to survive on patriotism alone. Two areas of government spending will be exempt from cuts: social welfare and defence. Pensions are going to be increased by 11.4 per cent next month and Russia’s huge arms industry will receive extra funding to offset western sanctions.

Special funding The government also includes provision for special funding of more than €600 million to support the farming sector and €3.26 billion for banks, on top of an €18 billion bailout package for banks.

One condition of that bailout for Russia’s top 27 banks is that they increase their provision of credit to the real economy by 1 per cent each month, in a move the government hopes will soften the slowdown and avert complete stagnation.

Siluanov estimated the crash in the oil income and western sanctions had affected Russia’s balance of payments to the tune of $200 billion (€176 billion), and he advised caution in the use of the country’s substantial cash pile to bolster government spending and prop up the rouble. Russia’s foreign reserves fell from more than €450 billion at the start of last year to €334 billion in January, largely due to failed efforts to halt the rouble’s slide, which ended in it being allowed to float freely in November.

As the East-West standoff over Ukraine intensified last year, so did capital flight from Russia, a perennial problem that drains cash and potential investment funds from the country; the central bank in Moscow says net outflows reached $151.5 billion (€133.6 billion) in 2014, more than double the 2013 figure.

If capital flight continues at such a rate, analysts say Russia could impose capital controls, although officials insist they expect the outflow of cash to slow this year.

The government may also be called upon to help companies and regions service debt, which is becoming harder to manage as sanctions restrict access to global markets and a cut in credit ratings increases the cost of borrowing.

Standard and Poor’s has downgraded Russian debt to junk status for the first time in more than a decade, a move which could be repeated by the other main ratings agencies and have a knock-on effect for major Russian companies. It could also prompt selling of Russian bonds and a ban on further purchases by funds that are mandated to buy only investment-grade debt.

Will any of this have the effect desired by the US and EU, and convince Putin to stop supplying Ukraine’s separatists with reinforcements and weapons? Probably not. Putin insists Russia is being punished not for annexing Crimea and fomenting war in Donbas, but for defending itself from the encroachment of hostile western powersvia Ukraine.

Growing chaos Having convinced Russians the stakes are so high, he is unable to disengage from the growing chaos in Ukraine without securing a commensurately large prize. Kiev has already offered a great degree of autonomy to eastern regions where war has now killed more than 5,000 people and displaced more than one million, but that is not enough for Moscow.

Ukraine’s leaders say Putin is determined to destroy the country’s nascent postrevolutionary order, to show that any prowestern uprising is doomed to end in bloody failure.

Millions of Ukrainians will not accept a return to any form of pro-Kremlin rule and would also reject, perhaps violently, major concessions from Kiev that might pacify Moscow. The leaders of Russia and Ukraine cannot back down, and so the Kremlin is focusing on eroding support for Kiev in the EU.

In response to tighter sanctions, Russia could also use its own economic weapons, such as restricting gas and oil flows to the EU or dumping its US-dollar debt and reserves.When asked about possible exclusion from the Swift global payment system, prime minister Dmitry Medvedev made clear Moscow’s anger. “If such decisions were taken . . . our economic reaction – and in general all other reactions – would be without limit.”

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