Research and analysis

Russia Economic - Gaidar Forum 2015

Published 26 January 2015

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Russia

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Russia

Summary

In his first significant speech of 2015, PM Medvedev reiterates his analysis of Russia’s deteriorating economic situation. Finance Minister Siluanov suggests that the lower oil price could leave Russia with a 3 trillion rouble (£30 billion) fiscal gap – and warns that a proposed 10% federal budget cut would only cover one-third of this. Medvedev also says that the government will seek immediate repayment of Russia’s $3 billion Ukrainian bonds unless Kyiv provides assurances that it will honour its debts.

Detail

Prime Minister Medvedev gave the keynote address at the Gaidar Forum on Wednesday 14 January. Speaking to a hall of senior officials, academics and Russian and international businessmen, Medvedev largely attributed Russia’s current difficulties to the 2008 global economic crisis and western sanctions, though he acknowledged that domestic structural constraints were a contributory factor. He repeated previous themes: the business climate for entrepreneurs needed to improve, levels of productivity had to rise across the state and private sector, more should be done to remove inefficiencies in budget spending, etc.

While he recognised that some in Russia wanted the economy to close up, the Prime Minister argued that his government would not introduce isolationist policies – this would be “a monstrous mistake”. He stressed that the rouble would remain fully convertible, and called for relations with Europe to be “normalised”. And he promised that the government would not “squander” Russia’s reserves: although some money would be used for infrastructure projects and recapitalising banks, all spending would be scrutinised carefully. He also announced that the government would constrain executive pay at banks in receipt of state recapitalisation.

Ksenia Yudaeva, First Deputy Governor of the Central Bank, announced that her responsibilities for overseeing monetary policy would be transferred to a new First Deputy Governor, Dmitry Tulin. She would retain responsibilities for forecasting and strategy at the Bank. Tulin has extensive experience of working at private- and state-controlled banks, and was previously a Deputy Governor in the 1990s and from 2004-2006.

Elsewhere at the Forum, Finance Minister Siluanov suggested that a $50/barrel oil price would reduce forecast budget income by a fifth, leaving a 3 trillion rouble gap (around £30 billion) in the federal budget this year. Russia was determined to keep any deficit low, but a 10% proposed budget cut would only cover one-third of the gap (it would also – Siluanov stressed – exclude defence spending). Economy Minister Ulyukaev argued that Russia’s large reserves and low debt placed it in a much better position than during the 2008 crisis. Siluanov, however, commented that the Russian economy in 2015, set for recession, was very different to 2008 when growth was still high. Sberbank CEO Herman Gref criticised the government for discussing how best to spend reserves and over what time frame, rather than longer term reform: “this is the worst type of economic policy you can imagine”. Kenneth Rogoff, a Harvard academic, warned policymakers that reserves could disappear very quickly, and raised concern that the slowdown could spark a new financial crisis in Russia.

Ukrainian debt

Medvedev stressed that all debt owed by Ukraine to the Russian state and Russian companies must be repaid. While Ukraine’s latest budget included funding to repay some creditors, he suggested that it made no reference to the $3 billion Ukrainian bonds owned by Russia which falls due for repayment in December this year. The government would therefore have to take a decision ‘in the near future’ on whether to invoke a special clause in these bonds, which allowed Russia to call in the debt immediately if Ukraine’s debt-to-GDP ratio exceeded 60% of GDP (which it now does). Russia did not want the Ukrainian economy, “in a disastrous state as it is”, to deteriorate further. But debt owed to Russia must be repaid.

Disclaimer

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