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Russia Earmarks $40 Billion to Bolster Economy

Catherine Belton
Tuesday, 19 Jun 2012 | 3:09 AM ET

Russia is setting aside up to $40 billion for this year and next to shore up the economy in case the crisis in the euro zone escalates and spreads, and is dusting off a plan that would allow the government to recapitalize the country’s banking system.

Moscow Russia
Photo: Frans Lemmens | Getty Images
Moscow Russia

In his first interview with a foreign newspaper since his appointment as finance minister last year, Anton Siluanov said the government had agreed to create a reserve mechanism worth 500 billion rubles ($15.4 billion) for next year “for the direct financing of anti-crisis measures.”

This would include support for “socially needy people” and “systemically important enterprises,” and the revival of a scheme proposed — but not implemented — in 2009 to issue government bonds to recapitalize banks in exchange for shares, Mr. Siluanov said.

This year, up to 800 billion rubles earmarked for one of Russia’s rainy day windfall funds — the Reserve Fund — could be spent on meeting any potential shortfall for budget obligations should the oil price stay below the average $117 a barrel at which the budget now breaks even. The Reserve Fund and the Welfare Fund currently contain $145 billion.

Separately, up to $4.4 billion in state guarantees for loans to enterprises has already been earmarked for this year’s budget, with $800 million already disbursed — a continuation of crisis measures introduced in 2009.

“We have practically prepared all the necessary measures so we can quickly implement them in case of a worsening of the situation,” Mr. Siluanov said.

“The problem with the last crisis at the beginning of the 2009 was that we spent time getting into the swing of it — we were passing normative acts and preparing anti-crisis commissions and changes to the budget, and because of this we lost a significant amount of speed in carrying out the measures and we lost the chance to react quickly.”

Russia’s main stock marketsare down more than 20 percent since highs in March and the ruble is down 13 percent due to fears over the euro zone crisis and the drop in the oil price to around $100, stoking jitters about how any further fall could impact the Russian economy.

Although Russia has debt of a mere 10 percent of gross domestic productand hard currency reserves of $500 billion, it is heavily dependent on oil and gas revenues. The global financial crisis of 2008-09 saw it lose $200 billion of its reserves in a matter of months as it defended a run on the ruble.

Even as Russia is calling on European countries to stick to austerity measures, Mr. Siluanov is facing huge pressure to loosen budget policy at home.

In the job now for just over eight months since his predecessor Alexei Kudrin resigned, Mr. Siluanov, a career finance ministry official, is battling on two fronts. Not only must he set aside funds in case of potential crisis, but pre-election spending promises made by Vladimir Putin in the run-up to presidential elections in March could also add significantly to outlays.

The populist pledges — including higher wages for teachers and doctors — could add an additional 2 percent of GDP to overall spending in the medium term, potentially further increasing the budget’s overdependence on oil and gas. The oil priceat which the budget balances has rocketed since 2007, when it stood at $34 per barrel, to $117 now. Analysts at Citigroup have warned that the spending pledges could boost Moscow’s break-even point up to $150 if they are implemented.

But Mr. Siluanov insisted that his ministry would keep the budget deficit at 1.6 percent of GDP for 2013, and 0.7 percent in 2014 — already fixed under a three-year plan — and would compensate for the spending hikes proposed by Mr. Putin by saving elsewhere.

“We are saying that we don’t want to change the size of the federal budget deficit despite the fact that when we enter the World Trade Organizationwe will also lose revenue from import tariffs,” he said.

Among the “budget maneuvers” being plotted to keep spending in line are the “delay of certain major spending items,” while other items of lesser priority could be cut, he said. The delays in spending could include the $700 billion military spending program that Mr. Kudrin cited as posing a risk for the economy when he resigned, Mr. Siluanov said. “Increasing taxes is the worst thing we could do,” he added.

The spending increases pledged by Mr. Putin would only cost the federal budget an additional 0.5 percent of GDP next year, while another 0.5 percent of GDP would come out of the pockets of regional budgets.

Mr. Siluanov ruled out any further tax increases, apart from the planned increases in mineral extraction taxes for gas companies currently being forwarded.

Speaking ahead of the G20 meeting in Mexico, Mr. Siluanov said his government was watching events in the euro zone very carefully, but stressed that Russia was still far from any crisis situation itself. But at a time when the International Monetary Fundis expected to request a further boost to its $430 billion firewall to support the euro zone, he called on the G20to make faster progress on agreeing IMF voting reform to increase the power wielded by the BRIC group of emerging nations .

“We, just like the other BRIC countries [Brazil, India and China] are interested in making sure the question of reforming [voting] quotas is not forgotten,” Mr. Siluanov said.

“[But] we don’t want to tie the question of aid and quotas. ... No one is interested in the crisis growing in the euro zone. We will take part in adding to the resources of the fund. There is no talk of conditionality.”

Mr. Siluanov added: “We are saying only that a decision was taken on changing the share of quotas in 2010 ... but no action has followed.”

He also insisted that the government would stick to a plan to reduce dependence on oil and gas revenues by sending all revenue generated from oil prices above $90 a barrel to the Reserve Fund or to pay off domestic debt from 2016. This would be defended despite a call by Mr. Putin ahead of elections to start spending some of the Reserve Fund on infrastructure projects, he said.

Mr. Siluanov said the government was working on a plan to erase the pension deficit in the next 15 years through pension reform. This would free up some 10 percent of overall budget expenditure currently spent on covering the pension deficit and allow it to be spent on infrastructure projects, he said.

“If we are sure these funds will be freed, then we can speed up the effect of this now and borrow funds from the reserve fund on a return basis … so as to invest them in infrastructure projects,” he said. The pension reforms, however, would not include any raising of the pension age, he added.

Stressing again that Russia was much better prepared for crisis than in 2008, Mr. Siluanov said Russian companies and banks had bolstered currency accounts so that funds deposited in foreign assets were now greater than the $530 billion in total foreign corporate debt.

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