Russia Readies for Economic Deterioration
2011-11-24 10:59:03
The Russian government is preparing itself for a worsening global economic environment that could dent high oil prices, upsetting the country's fiscal balance and further weakening the ruble.
The country's new finance minister said Monday he is "ready for the situation to worsen," which would put the budget balance at risk after an expected surplus this year. Prime Minister Vladimir Putin, facing parliamentary elections in days, warned lawmakers and the opposition not to "rock the boat" since Russia is facing "very many uncertain factors and risks," including a possible crisis.
With crude oil expected to end the year at the highest average price ever, tax receipts more than cover Russia's record spending levels ahead of the Duma and 2012 presidential election. Politically-sensitive inflation levels have fallen, and consumer-price growth will probably end the year under 7%, a low figure for Russia, amid an improved harvest following the severe drought of 2010.
Still, capital outflows are growing as the Russian financial system, unbound by any significant capital controls, sends billions abroad to repay corporate foreign debt and shore up European lenders. Outflows of $64 billion in the first 10 months of 2011 have dragged the ruble down, with the currency slipping 13% from May to 31.25 rubles to the dollar today, even as Brent crude remains relatively high at $107.73 a barrel.
Russia's rainy-day oil funds amount to only half as much, compared with gross domestic product, as they did on the eve of the 2008 economic crisis, Finance Minister Anton Siluanov said Monday at a conference. The oil funds won't get any new money if crude drops to $93 a barrel, he said.
Russia requires a consistent, annual increase in the oil price of 30% to compete with the economic growth of the fastest-growing emerging markets, Credit Suisse said Wednesday in a report. "The country's ability to maintain its purely commodity-related growth model is now approaching exhaustion," economist Alexander Redman said.
If the Italian financial system "goes down" or a major European bank collapses, then no Russian companies or banks will be able to borrow abroad and the Bank of Russia will have to inject even more liquidity to prop up the local market, said Sergei Guriev, rector at Moscow's New Economic School and a member of a commission advising the president on national projects. On a single day last week, the central bank lent 500 billion rubles ($16.07 billion) to banks.
Still, with its low debt levels and fiscal balance today, Russia is better off than many other countries in Europe so far, according to Jacob Nell, economist at Morgan Stanley in Moscow. A moderate drop in European oil demand may not hit global demand or prices too hard because of high energy efficiency in Europe, he said.