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Putin defiant on spending plan despite Russia downturn

Thursday, 12 Dec 2013 | 3:52 AM ET
AFP | AFP | Getty Images

Russian President Vladimir Putin said he sees no reason to abandon his spending pledges despite an economic downturn in the country.

Delivering his "State of the Nation" address to lawmakers and top officials in the Kremlin on Thursday, Putin said: "The economic cycle can and is changing, but this is no reasons to talk about revising our goals," Reuters reported from Moscow.

When Putin took office for a third presidential term last year, he pledged to increase spending on state sectors ranging from education to defense and to raise state workers' salaries, but his latest address to the country comes amid a raft of economic problems sparking concern both inside and outside Russia.

Before the financial crisis hit in 2008, Russia registered economic growth of around 8 percent in 2006 and 2007. Last month, the Russian economy ministry cut its long-term growth forecasts, saying it expects the economy to report annual growth of 2.5 percent up to 2030. In April, the government had predicted annual growth of between 4 and 5 percent to 2030.

Putin told the Kremlin on Thursday that the country's slowdown was down to domestic problems such as low labor productivity. "We have to be clear: The main reasons for the economic slowdown are not external but internal," Putin said, although he has previously blamed weaker global economic conditions for sluggish growth.

Russia's boom years have also left Putin and the country's central bank another problem: inflation.

A flood of investment into the country when it was being hailed as a leading emerging market led to a rise in the standard of living and cost of goods. This created a sticky inflation problem that the central bank is still struggling to contain. Indeed, above-target inflation means the central bank can't lower interest rates to stimulate the economy.

(Read more: Why Siberia could be Russia's secret economic weapon)

The Economy Ministry raised its forecast for 2013 inflation to 6.2 percent last week, signalling that the central bank's target of 4.5 percent is still unreachable despite the bank's resistance to cutting interest rates.

Against this worrying domestic backdrop, international observers have compounded concerns. The International Monetary Fund (IMF) revised its 2014 growth forecasts for Russia on Tuesday, saying it expected Russia's gross domestic product (GDP) to rise 2 percent in 2013, revised down from a previous forecast of 3 percent. Even its downgraded outlook for growth was contingent, it said, on "recoveries in investment and external conditions."

"Growth has continued to slow, while inflation remains above target and vulnerabilities persist," the IMF said. Risks included: "the prospective tightening of international financial conditions, Russia's dependence on international oil prices, growth in unsecured credit, and the impact of uncertainty concerning the pace of structural reforms on business climate and investment." In addition, it expected inflation to remain above the Bank of Russia's target.

(Read more: Putin editorial embarrasses US: Trump)

As the economy has waned then, so too have the approval ratings of the president.

According to data compiled by the independent Levada center, an analytical body which conducts polls on a sample of 1,600 people across 45 regions in Russia, showed that 10 percent of Russians polled disapproved of Putin in September 2008 while in November this year, 37 percent of Russians polled said they disapproved of him.

(Read more: How wealthy is Russian President Vladimir Putin?)

Views from the business world on Russia's economic progress, or apparent lack thereof, were mixed.

Giacomo Baizini, chief financial officer of Russian steel, mining and vanadium company Evraz told CNBC that Russia's hopes of small and medium-sized enterprises fuelling growth were not being fully realized.

"I can comment more as a private citizen living in Russia than as a CFO of Evraz. I think the hope has been that there will be a middle tier of industry – so somewhere in between the large businesses - such as us -- whether they're state-owned or private and the small, private enterprises that would drive innovation and growth."

"I'm not familiar with their results and I'm not an expert but in any case it doesn't seem to be an engine of growth, that's the impression [I get]."

We are 'unloved' as a Russian stock: Evraz CFO
Giacomo Baizini, CFO of Evraz, says steel stocks and Russian equities are not attractive to investors.

Liza Ermolenko, emerging markets economist from Capital Economics told CNBC that given the fact that the economy has slowed for structural reasons "it would seem that spending more is not going to solve the situation" though she added "at the same time you can't say that fiscal policy would be completely impotent."

(Read more: Russia must boost growth: Sberbank CEO)

"He can use fiscal policy to pick the economy up but it will be much harder than it would have been in 2008 and 2009 when the government just threw all this money into the economy. It's going to be much more difficult this time around"

Ermolenko said that the country's business environment was "so difficult." "investor protection laws have been so weak so that's why investment is so weak [now]."

From the investor's perspective, however, Russia still appeared attractive, according to one of the country's top fund managers. Jesse Sherman, a portfolio manager at Renaissance Asset Managers told CNBC Europe's "Squawk Box" that Russia presented "a very interesting investment environment" despite its economic woes.

"While there's no doubt that the initiatives are no necessarily delivering growth and this has been a very tough year. There is a growing universe, somewhat regardless of the economic conditions, are able to deliver strong growth that are exploiting opportunities at a very early stage of development and that's where we're focusing our investment."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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