Thursday, March 05, 2009

Russian Finance Minister Admits Mistakes But Predicts Recovery

Sources: Moscow Times, Kudrin Says GDP Could Grow in '10; CNN, Russia Admits Financial Mistakes; Forbes, Russia Budget Deficit to Shrink in 2010-11

In an interview with CNN Monday, Russian Finance Minister Alexei Kudrin admitted that Russia spent oil revenues too quickly during the boom, did not sufficiently diversify the economy, and did not pay enough attention to inflation. He claims personal responsibility for the failure to diversify and admitted that the government should have saved more of its oil revenues for a rainy day such as this crisis. He described the crisis as setting Russia back five years, but did not place blame on the United States or other foreign countries in an unusual admission of responsibility.

Russia will have an eight percent budget deficit in 2009, Kudrin confirmed, and also will run a deficit in 2010 and 2011, though the percentage will decrease. Overall spending decreases are not planned, but wiser prioritizing is, including cutting wasteful spending and decreasing funding to some projects. The priorities are social spending and infrastructure programs, for which funding will remain the same or increase.

In more positive news, Kudrin noted that the capital outflows have stopped due to the lack of an expected devaluation in the currency after January. He also quantified the budget deficits for the next two years, with the deficit for 2011 falling to three percent. Though Kudrin expects further contraction of the Russian economy in 2009, he predicted two to three percent growth in GDP for 2010.

According to Kudrin, private demand is key for growth, and the government should respond with such measures as lower taxes and tarrifs, salary support, and reduced administrative barriers. Though the government is using its public spending for a similar purpose, private demand is important and government investment cannot replace private spending. Instead, Kudrin describes government demand as a "mitigating factor," and government spending as a temporary measure that will be rolled back once private demand returns.

1) Do you think these optimistic predictions about Russia's economic recovery, combined with Medvedev's pulling away gradually from Putin's policies, will prompt a return of foreign investment to Russia?
2) Is private demand likely to return and stay in place for the foreseeable future, driving sustainable growth, or will the need for the government to step in continue given Russia's volatile emerging market economy?

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