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Will Russia's Huge Economic Stimulus Be Big Enough?

Russia surprised markets this week by announcing that it had set aside $40 billion to help insulate its economy against the euro zone debt crisis.

Steve Allen | Brand X Pictures | Getty Images

The ruble plunged against the dollar in May amid concerns about the price of oil and Vladimir Putin’s leadership. This has happened despite unexpectedly good first-quarter growth of 4.9 percent — while the rest of the BRICsdisappointed.

The euro zone crisis could affect Russia in several ways: by dragging down the price of oil, which is still central to the country’s economic growth; and by contagion effects on its banking system. Its foreign currency reserves would also plunge if there were a messy breakup of the single currency. Investors are afraid of a repeat of the events of 2008, when the Russian stock market plummeted along with the price of oil.

With all these factors in mind, there is uncertainty about whether this package will provide sufficient cover.

“I doubt it will be enough,” Charles Robertson, global chief economist at Russia specialists Renaissance Capital, told CNBC.com. “This is just 2 percent of GDP, and I would expect the cost of a euro zone breakup to be bigger than that for Russia.”

“While Russia is unlikely to experience the sharp drop in output seen during the global crisis in 2008-09, the present growth model looks unsustainable unless oil prices remain at or above $120 per barrel,” Neil Shearing, chief emerging markets economist at Capital Economics, wrote in a research note.

Shearing also believes that the measures will not be enough to negate the drags caused by a major euro zone disaster.

This crisis could be one of the first tests of whether Russia is moving away from its dependence on oil and towards a modern capitalist economy, as many of the world’s best-known economists and business leaders converge at the St Petersburg Economic Forum (SPIEF) this week. It will also be a test for the government, elected amid protests earlier this year.

“What’s good about this is that Russia is in the position, post-elections, to get its finances under control,” Robertson said.

“In 2008, authorities struggled to meet the demands of the market but this time around, they will be much better prepared."

He warned that one of the biggest factors spooking investors was the lack of clarity in the government’s policy toward the energy sector. The sale of BP’s stake in TNK-BP, for example, could either bring more of the country’s commodity assets under state control again, or bring new investors into the country.

The situation in the financial sector is widely believed to be have improved from four years ago.

“Russia’s banks are in better shape than in 2008, its external debt burden is lower and policymakers are alive to the threat of economic and financial contagion [and that] suggests that even if the euro crisis were to escalate and spread, Russia should be able to avoid the precipitous drop in output witnessed in 2008-09,” Shearing said.

Written by Catherine Boyle, CNBC. Twitter: catboyle01

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