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Analysis & Opinion
12.02.09 Time And Money
By Dmitry Babich

How long will Russia’s famous stabilization fund, the third largest in the world, be able to prop up the country’s economy, reeling from the crisis since September? The answer to this question has a direct relation to Russians’ consumer and business confidence, since the state and its enormous coffers are seen by both the population and business leaders as the main guarantor of economic stability. In this situation, the statement Arkady Dvorkovich, the president’s chief economic aide, made on Wednesday, in which he said that Russia’s budget deficit may reach ten percent of the country’s GDP in 2009, set off alarm bells in many of business headquarters.

The problem is that, according to Dvorkovich’s own estimates, Russia’s Reserve Fund amounts to no more than 12 percent of the country’s GDP, or 4.7 trillion rubles ($135 billion). Officially, the Reserve Fund is that part of the country’s Oil and Gas Fund (formerly known as the Stabilization Fund) which is meant to protect the economy from the consequences of a possible sharp fall in oil and gas prices. “In a year, Russia will have spent almost its entire Reserve Fund,” the Nezavisimaya Gazeta daily warned in a front page headline on Thursday.

However, expert estimates paint a less gloomy picture of the budget realities for 2009 and 2010. Firstly, Dvorkovich’s estimate of ten percent is much higher than the estimates of other officials from the government and the Presidential Administration. In fact, Dvorkovich even presented it as a sort of a worst case scenario: “The deficit may reach ten percent,” he said. “But the planned level is eight percent of the GDP, and by all means it should not exceed ten percent.” Russia’s Finance Minister Alexei Kudrin, even though he has been admitting that a deficit is possible since November 2008, set the deficit plank at 6.1 percent of the GDP in early February. In this context, Dvorkovich’s statement may sound a bit too alarmist even by crisis standards.

Secondly, even if budget expenses stay at the planned level of nine trillion rubles, there are ways to lessen this burden on the country’s reserve coffers. “There is always the tried and tested method of keeping budget expenses low – devaluation,” commented Alexei Makarkin, the deputy general director of the Center for Political Technologies in Moscow. “Besides, there are articles in the budget which can be slashed without the bulk of the population noticing it.”

Among such articles Makarkin singled out the so-called Investment Fund, which stood at 104.3 billion rubles in the year 2008 and was already expected to drop to 93.3 billion rubles in 2009. “If there is a cut in investment programs, which continue to be fulfilled, especially in the part relating to infrastructure – railways, highways – only a small part of the population will feel damage done to its interests,” Makarkin said. “Meanwhile, the government’s aim is to prevent the bulk of the population from feeling the effects of the crisis, which will be inevitable if all of the Reserve Fund is spent. The government would rather channel the unpopular measures to separate interest groups – to car importers today and tomorrow, maybe, to people involved in the projects of the Investment Fund.”

Most of the experts agree that there will be enough money to prop up the economy and the current level of state expenses until 2010. Polls indicate that the population’s expectations are even less optimistic. However, Russia’s paradox is that people do not cancel their planned large-scale purchases, and in general change their consumer behavior at a pace much slower than expected. Statistics indicating this trend were posted by Russia’s State Committee on Statistics on its Web site and surprised many experts.

“Yes, indeed, people continue buying things that they had included in their purchasing plans before the crisis, even though 40 percent of them say it is not a good time for such purchases,” said Olga Mukhanova, the head of the department of consumer statistics in Rosstat. “The only logic that one can see behind it is the following. The savings have been made, the money is there, and people do not trust banks and other financial institutions where they could invest this spare money. So, they grudgingly spend their savings, even though they agree that this is not a good time for expenses.”
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