Monday, April 06, 2009

Putin Defends Russian Economy Despite 4.5% Predicted Contraction and Falling Oil Prices

Sources: BBC, Russia's Poor 'Need Crisis Help'; Reuters, Oil Falls Toward $50; Bloomberg, Putin Says $90B Stimulus Plan to Ease Hard Year; Wall Street Journal, Putin Defends Economic Record; BBC, Putin Says Russia Can Beat Crisis

The World Bank last Monday predicted that the Russian economy will contract 4.5% in 2009, as opposed to the Russian government's expectation of 2.2%. The World Bank cautioned that the rapid and dramatic decline of the Russian economy will put significant stress on the country's poorest citizens, and recommended that the government shift its anti-crisis program to focus on social spending including pension and unemployment payments. One of the biggest downward pressures on the economy is the price of oil, which is approaching $50/barrel on average.

Today, Prime Minister Putin responded with optimism in an address to the Duma (lower house of parliament), making it clear that the road ahead will be difficult for Russia, but not insurmountable. He is planning a $90 billion stimulus package for Russia in 2009, after the government's abandonment of a three-year budget approved before the size of the crisis in Russia became apparent. Putin refuses to blame the government for the impact of the crisis on Russia, framing its effects as inevitable and instead focusing on a decisive response and the government's achievements in softening the impact.

Current concerns include high unemployment, an expected 8% budget deficit, the need to spend reserves in one of Russia's sovereign wealth funds, and low domestic demand. Budget revisions include a "safety cushion" that can be used if further economic downturns occur, and other responses are being planned in addition to the budget. For example, payroll taxes may increase in 2011, and Putin is encouraging banks to consolidate to address default risk on the horizon. Corporate debt is also an issue, and the government may take a stake in some corporations, but feels no obligation to do so. Another possibility is price controls on oil and gas, but Putin is hesitant to risk harm to companies' profitability and recognizes the impossibility of complete isolation from the crisis.


1) Do you think Putin's expectations are realistic, or do you suspect that it may be impossible for Russia to recover from this crisis as quickly as he might prefer?
2) Can you think of any ways the Russian government might achieve a balance between the interests of corporations and the interests of individuals in its budgeting process? Should one of these interests be prioritized over the other?

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