In mid-March, 2009, Prime Minister Vladimir Putin had cautioned Russians that they would have to face budget deficits for quite a number of years. That cannot have been music to their ears since this will be the first year, in eight, that their national budget will be in deficit?and to no less than 3 trillion roubles, or 7.5% of GDP. The Russian PM must have exacerbated the overall level of anxiety by warning that the deficit would be all the more reason to attend to the business of hiking efficiency in spending.
The only saving grace is that the funding, thanks to Russia?s reserves, is already available. And, it would have made a lot of difference had last November?s $70 bbl projection for crude held true. That would have yielded a budget minus the need for deficits?but it was not to be, and the current budget is based on a sub-$40 bbl price (although the next three will have $55 bbl as their reference point.)
Also, Russia?s brief flirtation with OPEC is over and it currently exports far in excess of Saudi Arabia. Even then, the OPEC member states, in effect, are the ones who are subsidising Russia?s oil (and oil-industry)?that, to the tune of $150 mn daily. Yet, that has done little for Russia?s exports!
April trade figures has taken a beating: Klepach reported that exports fell by 46.1%, to $21.7 billion, while imports were down by 44.7%, to $14.2 bn. It is clear that the Russian economic model will have to await the upturn before higher fuel prices, and greater world demand?overall, energise the external demand side. Until then the story will have to be of greater reliance on FDI into ?non-strategic? sectors and greater domestic demand.
But even that could be hard to do, seeing how Russia?s first quarter (Q1) GDP was down actually, and by no less than 23% compared to 2008. Industrial production, too, was down and could occasion a contraction of 2.7%. And that, in turn, has led to inexorable rises in employment?to over 9.6% in May 2009?although the trend seems to have flattened out somewhat.
In fact even the rescue plan named after Prime Minister Putin seems not to have had any positive effect. Despite the offer of $9 billion in state guarantees it has been unable to energise lending to strategic companies and?looking for reasons?The World Bank cites a ?silent tsunami? of bad debts! Others even stake their reputation on the fact that the bailouts would need no less than $50 bn. Plainly, the latter need to be made good before Russia?s loan-saddled companies can shake off their past and assist Russia on its path to recovery. The roiling, and vertigo, which have been assailing the bourses and financial markets, are plainly in view in the accompanying charts. Putin, meanwhile, has promised that there will be no resorting to the printing press to meet deficits. It should also put brakes on downward reappraisals by credit agencies.
The above are the function of weak commodity prices, plus the deleveraging under way in international capital markets (although, mercifully, the three other Bric economies seem to have weathered the latter). But precisely those developments have left Russian banks and companies to service and refinance external debt. And, yes, Russian reserves did provide a backstop to such downgrades: but, seeing the social content of the 2009 Budget, even they will be drawn on now; the sequel to that remains to be seen. That is because the new incomes policy will not only address the issue of demand-maintenance, it will also strengthen the ?social orientation of the budget?. Outlays on key, social/anti-crisis programmes will not be pruned.
That sums up Russia?s 2009 Budget. It is a careful mix of demand-side policies, allied to social commitments and monetarist conservatism. It is clear that the implementation of the whole will be undertaken with a wary eye on prices, the supply side, and the urgent need to carry out financial reforms.
?The author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata. These are his personal views