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Analysis & Opinion
28.05.12 Warning Signals
By Tai Adelaja

Economists once again sound an alarm bell about the shaky state of the Russian economy, warning that the country is much more unprepared for a new wave of economic crises than it was in 2008. In the event of a new episode of global financial turmoil, Russia's $60 billion Reserve Fund will not be enough to meet Russia's enormous needs for a year, according to a new report published by leading Russian economists on Friday.

Today the Russian economy is less stable and more vulnerable to market shocks compared to the first quarter of 2008, the economists from the Higher School of Economics' (HSE) Center for Development said in a report titled “A New Crisis: the Government and Business.” Even though Russia’s current external debt is smaller than in 2008, the economists believe that the economy is not out of the woods yet. The experts also noted that the present growth in consumer lending is being fueled by funding from the Central Bank rather than by customer deposits or foreign borrowing, as was the case in 2008. But even this positive trend merely contributes to an illusion of stability.

A flurry of recent reports about Greece's likely exit from the euro zone has raised fresh concerns about the ability of emerging economies like Russia to weather yet another economic crisis. In a worst-case scenario presented by Sberbank's Center of Macroeconomic Studies on Wednesday, Gree?e's leaving the euro zone may cause Russia's GDP to slump by two percent annually, while capital flight will grow to $100 billion and the ruble will be devalued.

Mikhail Dmitriev, the president of the Center for Strategic Research, warned last week that Russia’s political stability could be shaken if Greece were to leave the euro zone, triggering a global crisis and damping oil prices. Dmitriev, who correctly predicted the current standoff between the middle-class and the Kremlin, said there is a more than a 50-percent chance of a Greek exit, which would lead to more countries pulling out of the currency union. A worsening economy could raise the risk of sentiments against the Russian president swelling and an increased possibility of political repression, the former first deputy minister of economic development and trade said.

But HSE economists saw a more troubling trend in what they call "the routine optimism" that dominates thinking at the Russian Central Bank, where officials have always claimed that the country is better prepared to withstand external shocks than in 2008. Central Bank Chairman Sergei Ignatyev assured Russian legislators last Wednesday that the country is now in a better fiscal situation than it was four years ago. Russia's Reserve Fund, set up to cushion the federal budget against a fall in oil prices, stood at $62.16 billion as of May 1, 2012, according to the Finance Ministry. Since the onset of Russia's financial crisis in September and October of 2008, the $125 billion Reserve Fund has been tapped by the government "on a monthly basis" to prop up the economy and fill holes in the budget, RIA Novosti reported. However, analysis by the economists suggests that whatever remains of the Reserve Fund cannot last longer than a year even if the government only fulfills part of its current obligations.

In April, investors pulled about seven billion dollars out of the country, a trend the economists said is likely to continue in May. "The Central Bank’s optimism looks even more dubious against the backdrop of such developments," the economists wrote in their report. The experts cited Russia's growing reliance on oil prices as more evidence that the so-called “Russia is ready for a crisis" thesis has fallen flat. "The level of the oil and gas deficit has been hovering around ten percent of the GDP and can hardly be reduced over the coming years," said Natalya Akindinova, director of the Higher School of Economics' (HSE) Center for Development. Even if oil prices drop moderately to $80 per barrel, the volume of the Reserve Fund will not suffice to keep the Russian economy afloat, she said. The government's budget obligations can only be fulfilled if oil prices continue to grow by eight to nine percent annually, she added.

Another cause for concern, the economists said, is the increasing share of budget doll-outs in Russians’ personal incomes and consumer spending. The economists said the government willingly accelerated economic growth by boosting consumer lending by more than 40 percent over the past 12 months, "triggering fresh concerns about overblown consumer optimism." The situation is complicated by the widening gap between the government's declared goals and the possibility of their actual implementation. "In order to realize its ambitious plans, the government needs enormous resources, which can only be obtained by improving the investment climate," the economists said. "However, the government has been sending exactly the opposite message to investors."
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