Emerging Markets

Russia faces full-blown crisis says Kudrin

Jack Farchy

Russia faces a "full-blown economic crisis" next year that will trigger a series of defaults and the loss of its investment-grade credit rating, a respected former finance minister has warned.

Real incomes will fall by 2-5 per cent next year, the first decrease in real terms since 2000, said Alexei Kudrin, a longtime ally of President Vladimir Putin and widely tipped to succeed Dmitry Medvedev as prime minister.

People gather near a currency exchange office in Moscow, Dec. 17, 2014.
Maxim Zmeyev | Reuters

His warning came as Russia's central bank was forced to prop up a mid-sized lender in a sign of the strains on the banking system.

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"Today I can say that we have entered or are currently entering a full-blown economic crisis; next year we will feel it in full force," Mr Kudrin said in Moscow on Monday.

In unusually blunt comments for an establishment figure, he also called on Mr Putin to do what was necessary to improve relations with the west: "As for what the president and government must do now: the most important factor is the normalization of Russia's relations with its business partners, above all in Europe, the US and other countries."

His bleak forecasts for the Russian economy come after a week of high drama in which the ruble fell by as much as 36 per cent in one day, rattling popular confidence in the government.

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On Monday, the ruble rose 5.1 per cent to 56.5 to the dollar following a series of measures announced in the second half of last week to shore up confidence in the banking system.

The central bank said it would inject 30 billion rubles ($530 million) into Trust bank, the country's 28th-largest lender by assets, "to prevent bankruptcy".

Russia to enter 'deep recession' in 2015?
Russia to enter 'deep recession' in 2015?

The wild gyrations in the ruble and on Russia's equity and bond markets last week have taken their toll on banking sector liquidity, with interbank interest rates rising to the highest level in nine years. The central bank and government have announced a series of measures to support the banking sector, including a 1tn rouble ($18bn) recapitalisation plan announced on Friday.

The central bank said the state deposit insurance agency would take over administration of Trust bank while a buyer was sought. "It is assumed that the investor will be one of the large Russian banks," the central bank said in a statement.

Mr Medvedev told the heads of Russia's big banks on Monday to make sure that during the new year holidays people had "an opportunity to relax without worrying about what is going on in the banking sector".

In another sign of pressure, the government said it would impose duties on exports of grain, which have boomed because of currency weakness, forcing prices up for domestic consumers.

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Mr Kudrin said the economy would contract by at least 4 per cent next year if oil prices remained at $60 a barrel, echoing central bank forecasts of a 4.5-4.7 per cent contraction. There would "certainly" be a recession in 2016.

"Russia will have its rating downgraded, it will be cut to junk," he said. "Due to the economic disruption . . . payment discipline will fall significantly and we will see a series of defaults of medium-sized and large companies."

Mr Kudrin also predicted an increase in dissatisfaction among the population that could have a political impact. "There will be a fall in living standards, it will be painful. Protest activity will increase," he said.

He declined to comment on his own potential return to the government.