Friday, February 20, 2009

Medvedev Criticizes Slow Movement on Russia's Economic Crisis

Sources: International Herald Tribune, Russian President: Government Too Slow in Crisis; AFP, Medvedev Slams Russian Lethargy on Crisis; International Herald Tribune, Numbers Illustrate Russian Economy's Weakness; Reuters, 300,000 Russians Lose Jobs in January

Russian President Medevedev criticized the government for moving too slowly to address the economic crisis in an address today before federal and regional economic officials. Though the criticisms were aimed directly at regional governors, and though Medvedev fired three of these governors early this week, there is also speculation that the indictment of the government's response to the crisis was indirectly aimed at Prime Minister Putin, who is in charge of economic policy.

Putin and Medvedev have worked well together since Medvedev took office last year, but the financial crisis has also exposed some differences in the leaders' response styles. This is the third indirect criticism Medvedev has made of the former President. Specifically, Medvedev complained that implementation of responses has been inadequate, too slow, or non-existent. He stressed the need to diversify away from a singular focus on oil and gas, the need to develop infrastructure, and the need to strengthen the financial system.

One interesting point is that it is Putin whose emphasis on centralization as President gave Medvedev the powers that he has over the regional governors, including the ability to fire them. One major element of Putin's presidential legacy is a return of control to the federal government after Yeltsin's de-centralization, giving the federal government exclusive legal control over more areas and strengthening political control over the regions. Putin's reforms also strengthened the federal government's tax collection abilities, which were dangerously weak in the 1992-1998 period under Yeltsin, leading in part to the 1998 Russian financial crisis.

As Minister for Economic Development Elvira Nabiullina pointed out at the same event where Medvedev spoke, one of Russia's main concerns in the current crisis is predictability. Because financial markets are not predictable, and movements are uncertain, investors have difficulty deciding whether and where to invest. This financial crisis has shown the importance of investor confidence throughout the world, but it is particularly fragile in emerging markets such as Russia where swings in the markets may be more volatile. The government intends to address this issue by prioritizing investment in certain areas in order to influence and stabilize certain markets.

Another major problem is employment, as recently released numbers reveal. Russia recorded around 300,000 job losses in January, bringing the total number of unemployed persons in the country up to 6.1 million. This makes infrastructure projects especially crucial, as they will not only direct public spending into an area that expands Russia's long-term productive capacity, contributing to sustainable growth, but also create new jobs for these unemployed Russians.

Of course, such spending does affect the budget's balance, and a combination of increased social spending and oil prices that continue to fall have increased Russia's deficit to 8% GDP. The newest budget is not only based on an oil price ($41 a barrel) that is higher than the current price, but is significantly larger than the previous one. About $52.3 billion of government money is being spent on efforts related to economic recovery, but the government hopes that this spending will stimulate the economy and pay for itself in the long-run. Capital investment also fell three times more quickly than predicted in 2008, and average wages fell 9.1% in a year, adjusted for inflation. Investors' total withdrawal of capital from Russia since August stands at $300 billion.

1) Do you think Medvedev would be wise to separate his approach from Putin's as the crisis continues, looking for new solutions, or should the two leaders make efforts to work together to avoid a schism in a time where cooperation is necessary to weather the economic storm?
2) Is heavy social spending with a view to stimulus wise at this time, or would it be a better idea to keep the budget balanced and avoid an untenable debt situation?

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