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Analysis & Opinion
21.05.09 Every Banker For Himself
By Sergei Balashov

Russia is reversing its much-criticized anti-crisis strategy of generous hand outs to troubled banks and businesses. Having acknowledged that this policy produced mixed results at best, and was counter productive at worst, the government finally seems to have recognized the need to tighten its belt and refrain from providing lucrative financial support to either banks or the real sector.

President Dmitry Medvedev outlined the guidelines for Russia’s budget policy for 2010-2012 on Monday, calling for spending to be adjusted to the new economic environment, and put heavy emphasis on social spending. Next year’s budget will be based on an oil price of $50 per barrel. This number will amount to $52 and $53 for 2011 and 2012. The president’s address to the government warned against turning banks and companies into the state’s “dependants.”
This is basically a complete reversal of the policies implemented at the outset of the crisis, when Russia found itself in a deep economic quagmire severely complicated by depleting commodity prices, weakened demand, and capital outflow. The deep Reserve Fund, which Vladimir Putin boasted about on more than one occasion, was used to support the wilting economy.

The government immediately approved over a trillion rubles in loans to the country’s leading banks and provided $50 billion in loans to corporations, meant to help them repay external debts. Heavy spending continued well into 2009, but the success of the policy was questionable, as the state failed to control what the banks were spending the money on and many end recipients in the real sector did not get any cash. “It didn’t work to the full extent, it only worked partially. The efficiency amounted to ten to 20 percent, so about 80 to 90 percent of this cash went nowhere,” said Oleg Vyugin, the chairman of the board of MDM Bank, at an anti-crisis roundtable at RIA Novosti.

The measures were not only inefficient, but also turned out to be counterproductive. Banks rushed to spend the extra cash on buying foreign currency, causing the ruble’s value to plummet. The government was forced to sell currency from the Reserve Fund to support the freefalling ruble, which underwent gradual devaluation.

Considerable amounts of money were spent on aid for the real sector. The government compiled a list of strategic companies that would become the prime recipients of financial aid. By March, banks had allocated more than two trillion rubles in loans to the companies from the list.

Leading carmaker AvtoVAZ received more than 25 billion rubles of direct state aid to cover a part of its debt, and state contracts worth another 12.5 billion rubles. Protectionist measures were also implemented, with tariffs on imported cars being hiked. “The support of the banking sector did not lead to an adequate boost in the industrial sector. About two thirds of the budget revenue comes from VAT and export duties, so when industries are in a recession it leads us to the kind of situation we’re in now,” said Dmitry Parfenov, an analyst at the Prospect investment company.

The proportion of companies running a deficit increased to 44 percent in the first quarter of 2009. Now Russia has a huge budget deficit on its hands. Medvedev has stated that he expects the budget deficit to reach 7.4 percent of the GDP, while the Ministry of Finance put forward an even gloomier forecast of nine percent, a huge shock for a country that has experienced sustainable economic growth for the past decade. The Reserve Fund has also shrunk and could run out as soon as next year, signaling the need to revise the anti-crisis policies that got it into such a situation.

However, this might not be the only reason why the government should stop doling out money and breeding “dependants.” “By interfering the way it did, the government actually did harm as it supported certain industries and everybody knew this support would not last forever. Uncertainty lingered, nobody knew what demand was going to be after the crisis would come to an end. This uncertainty still remains and it is one of the obstacles for the resumption of bank tending,” said Evsei Gurvich, the head of the Economic Expert Group, a think tank.

Medvedev left open the option of extending more anti-crisis programs to businesses, but even if there are any they will not be anything like the previous projects, which included large military contracts, aid for the so-called “strategic” industries, and programs calling for heavy investment into infrastructure, including roads and transport.

The government was expecting a short or mid-term crisis, but now it is clear to almost everyone that the economic downturn is here to stay. Medvedev’s aide Arkady Dvorkovich has said he expects the crisis to last three years. Medvedev’s conservation strategy aims to keep expectations modest, prepare the economy for a long recession and keep it in “stand-by” mode.

The budget for 2010 is supposed to go to the State Duma in August, but Vladimir Putin recently proposed moving the date back to October. This means that Russia wants to get as much news as it can about the condition of the U.S. economy and the global financial markets first, leaving the budget open to further revision. “There is hope that we’ll get some positive messages in autumn and winter, so this could still be revised. They are just delaying the preemptive measures, like another stage of devaluation. They want to delay this for as long as possible, but they had to sacrifice some of the spending,” said Parfenov.

Social spending, however, is one thing that the government will not economize on, as memories of the round of anti-government protests in winter are still fresh. “They’ll have to keep up spending, and they have decided to go with the social spending. Obviously they want to avoid further tensions,” added Parfenov.
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