Europe News

Russian budget: Is Putin facing reality?

Russian President Vladimir Putin

Russia's first post-sanctions budget, submitted to the government on Tuesday night, suggested the Kremlin is more hopeful than most about the country's economy.

The Kremlin's forecasts for every measure of the Russian economy seem rather optimistic compared to the consensus elsewhere.

Russia capital controls not needed: VTB CEO
Russia Central Bank says does not plan to implement capital controls: Reuters

For the core economic growth measure of GDP, the Russian government predicts 1.2 percent growth in 2015, while the World Bank forecasts 0.3 percent. Inflation will be 5 percent next year, according to the government, despite a current rate of 7.6 percent. And its forecast for the average oil price, key to Russian exports, is around $100 a barrel next year, when the Urals crude oil price, Russia's benchmark, has recently fallen to $93 a barrel, and is expected to continue below $100 a barrel for months.

Elsewhere in the budget, defense spending has, unsurprisingly given continued skirmishes with Ukraine, been hiked.

Russia has also opened the possibility of tapping its reserve oil funds for cash. While official sanctions by the West against Russia don't yet target a wide range of Russian companies and individuals, many Western companies are delaying investment in Russia and not lending to Russian companies, in case further sanctions are imposed.

We are focusing more on Asia: VTB Capital CEO
Russia retaliates with sanctions: Winners and losers

"We have to replace the markets with government support," Andrey Kostin, chairman and president of VTB, Russia's second-largest bank, told CNBC at the Russia Calling forum in Moscow.

"The main issue is whether Russia is going to continue an open market economy."

Russian banks are benefiting from more business from Russian businesses unable to get hold of finance outside the company, Alexei Yakovitsky, global chief executive at VTB Capital, told CNBC.

What's behind the weak demand for oil

"There's a lot more work and a lot more clients wanting finance," he said. VTB is focusing more on Asia and Africa in the post-sanctions world – but "not closing the door on the U.S. or Europe because we do believe things will come back," Yakovitsky said.

Rumors that the government may impose controls to stop the flow of capital out of the country were dismissed by Kostin, who said he does not expect them at this stage, but "never say never."

Russia has been through tough economic times recently, during the 2008 crisis, and its weathering of that storm appears to have given Russians more faith in the government's ability to withstand the sanctions fallout.

Arkady Dvorkovich, Russia's deputy prime minister
Russia Deputy PM: 'Sanctions not good from any side'

Kostin claimed that sanctions so far are "biting but not deadly" – and highlighted the potential negative consequences for the rest of the world if the Russian banking system gets into trouble.

"My concern is that it breaks the whole world financial infrastructure, if one group of countries is trying to break the banking system of another," he told CNBC.

- By CNBC's Catherine Boyle