Russian Forecasts Worsen; Medvedev Criticizes Finance Minister

Sources: Reuters, Russia Reserve Fund Falls as Budget Deficit Funded; The Guardian, Russian Economy to Stagnate in 2010; LA Times, President Medvedev Takes Apparent Jab at Russia's Finance Minister over Crisis Talk; AFP, Medvedev Scolds Officials for Gloomy Forecasts

Recent IMF forecasts for Russia show worsened conditions, with the GDP contracting by 6.5% in 2009, rather than 6% as predicted earlier, and zero growth expected for 2010, where the earlier forecast had predicted a modest 0.5%. The reason for the adjustment is the lack of any indication that there will be a sustained recovery soon in oil prices, paired with the fact that it is unlikely that Russia will see the same levels of foreign capital flowing into the country as before the crisis.

Russia has been dependent on its two sovereign wealth funds, bloated with money from tax on oil revenues in the months immediately preceding the crisis, and the Reserve Fund—the one of the two that allows for shorter-term investments—shrank 12% in May alone. The government was trying to cover a deficit that was originally estimated at 7.4% GDP, but which a Russian official now admits is closer to 9%. The Fund has not shrank by quite so much in dollar terms, due to the decreasing value of the dollar, but if Russia continues to draw from it there could be cause for concern.

Both the IMF and the Bank of Russia want the ruble to eventually float freely, possibly as soon as 2010, rather than in a controlled band. President Medvedev has indicated his approval for this goal by re-appointing the Bank's chairman for a third one-year term. The IMF would also like to see a gradual relaxation of monetary policy in the coming months, and a strong response to inflation.

Meanwhile, though Medvedev acknowledges that the situation in his country is "moderately negative," he notes that Russia is not the worst-off country in this crisis, and retains some optimism. He sharply criticized his Finance Minister Alexei Kudrin, albeit without naming his name, for a prediction last month that recovery would be unlikely for Russia within the next ten, twenty, or even fifty years. Medvedev indicated that such a statement was only proof of poor performance on the part of the one saying it, and is insistent in focusing on what can be done rather than the bleak forecasts. GDP decline, for example, did slow on a monthly basis in April. Political instability, however, could result from high unemployment in Russia combined with its overall economic problems, and Medvedev is no doubt concerned about this possibility.

Questions:

1) Do you think that Medvedev's cautious optimism through this crisis has been misplaced? Is Kudrin going too far, or just being realistic?
2) Do you expect that this crisis will result in an electoral shake-up in Russia?
3) Do you think that it is a good idea to allow the ruble to float freely, or better for the central bank to maintain some control in the form of the band?