After years of plenty, Russia returns to earth

Posted in Russia | 24-Mar-09 | Author: Andrew E. Kramer| Source: International Herald Tribune

Igor Shuvalov, Russia's first deputy prime minister, speaking on the telephone in his Moscow office on Wednesday.

MOSCOW: After years of coasting on high commodity prices, the Russian government is now acknowledging it will need to get by on a much diminished revenue stream for the foreseeable future. At the same time, economic policy officials here are striking an upbeat note, saying declining oil income is likely to spur growth in other areas of the economy.

Still, like an investor waking up to big losses, the new reality for Russia set in last week when the government, after some delay, introduced a budget that was deeply in deficit after years of huge surpluses.

Igor I. Shuvalov, a deputy prime minister, said on Friday that the government was not waiting for global commodity prices to recover but instead was laying plans to spark economic growth outside of the extractive industries that had been behind so much of the recent prosperity.

Policies to this end include stimulus money in the budget, support for small and midsize businesses, a new emphasis on improving labor productivity and an exchange rate favoring domestic producers over importers.

Also last week, the minister of economy, Elvira S. Nabiullina, told a government meeting that she expected the first growth to come from companies selling domestically, rather than exporters. Internal demand helped by government spending drawn from oil windfall money salted away in past years could result in economic expansion. Ms. Nabiullina predicted growth of between 2 percent and 4 percent next year.

Growth, she said, "will not only depend on the degree to which the global economy improves, but on an increase in the efficiency and competitiveness of the Russian economy," the Interfax news agency reported.

Russia's lower house of Parliament, the Duma, is scheduled to consider the budget on April 6, the speaker of the house, Boris V. Gryzlov, was quoted as telling reporters in Moscow on Monday.

Russia's main stock exchange had a rare bounce on Monday, although traders attributed it more to a higher oil price. The Micex gained 7.29 percent, recovering a bit of the almost 80 percent it has lost since last year.

While independent economists have been skeptical of Russia's chances of recovery without a return to high oil prices, crisis has proven an effective fillip for reform here before.

In the wake of the 1998 financial crisis, a devaluation of the ruble spurred industrial recovery even before oil prices bounced back. In the wake of that disaster, the Russian government also passed a number of sweeping economic reforms, including a flat tax. Russia's two most intense eras of economic reform ? the initial post-Soviet privatizations in the early 1990s and after the 1998 collapse ? both followed crises.

Policy makers are again focusing on some of the silver linings of low oil prices for Russia, said Mr. Shuvalov, who is among a group of liberal economists in Prime Minister Vladimir V. Putin's government.

"I won't say we feel comfortable, but we feel confident," Mr. Shuvalov said, assessing the government's view of the economy. "Even without high prices for oil, metals and gas we can achieve new growth."

Still, Russia depends deeply on oil. That has also been on display this month.

The government was compelled to rewrite its budget for 2009, which had been based on an estimate that oil would average about $95 per barrel this year. The new budget estimates an oil price of $41 per barrel, with a deficit of about 8 percent.

Oil was trading above that level Monday, with benchmark Brent crude at more than $51 per barrel at midday in London. By tapping an oil windfall fund built up during the boom, however, the government will increase spending slightly compared with what had previously been planned.

The new funds will be directed at industries with large numbers of employees, preventing unemployment but also stimulating consumer demand inside Russia, relieving the economy's reliance on exports.

"There's no point hoping for high oil revenues in the near future that would solve all of our problems at once," Mr. Putin conceded when he introduced the new spending plan on Thursday.

Russian officials have been discussing the need to diversify the economy away from oil for years and little has come of it. Roland Nash, the chief analyst at Renaissance Capital, said the new emphasis on this theme is welcome, but won't solve Russia's problems quickly.

Even by the standards of the global slowdown, Russia has fared badly. The stock market is down about 80 percent, investors have pulled tens of billions of dollars out of the country and the economy is projected to shrink this year, for the first time in a decade. Foreign investors began to flee even before the downturn, as some industries were effectively nationalized under Mr. Putin.

No matter how deft the policy making now, Russia will struggle to overcome these setbacks without higher commodity prices, Mr. Nash said.

"They've managed it well," he said. "But the crisis is not of their own making. Until global markets stabilize, the best they can hope for is to manage the volatility."