Policy Matters: Russian Government Alters Anti-Crisis Plan

By Blake Marshall, Senior Vice President & Managing Director - Government Relations, The PBN Company

Russians returned from the long holiday season in January with a new comprehension of the depth and breadth of the Russian economic crisis.  A crisis that started in the Russian financial markets and corporate world is being felt in early 2009 in the “real world,” with mounting unemployment, declining rubles and rising prices.

Russians also returned to a more candid and forthright government, which laid out a sober assessment of the economic crisis and provided details about the government’s plans for addressing it.  President Dmitry Medvedev’s recent television address to the nation, for some reminiscent of Roosevelt’s fireside chats in the U.S., was an important first step in reassuring the Russian public about the government’s handling of the crisis.

Gone were government proclamations of continued economic growth and balanced budgets.  Instead, the government announced in February that the economy would contract by -2.2% in 2009 - the first decline in a decade - and its budget would go into the red to the tune of 8% of the country’s GDP.

Also gone were the finger pointing and blame game.  While the crisis may have started in the West, there is now broad understanding that structural flaws in the Russian economy and an underdeveloped financial system are to blame for Russia’s economic woes.  As President Medvedev said last week, the Russian crisis is “not a macroeconomic problem, and not a consequence of difficulties in the world financial system, but simply our inability to work quickly and effectively.”

As a result, more comprehensive anti-crisis measures are being formulated, and a new commission was formed in December solely to focus on the government’s response to the crisis.  Created by Prime Minister Vladimir Putin, led by First Deputy Prime Minister Igor Shuvalov and run by ministers and heads of state banks, the Anti-Crisis Commission is effectively a parallel Cabinet devoted to implementing anti-crisis measures.  Despite Western media reports that fissures are emerging between President Medvedev and Prime Minister Putin, the two leaders remain in sync on the anti-crisis approach.

Many of the actions taken by the government in the fall of 2008 significantly lessened the impact of the crisis.  The government injected massive liquidity into the banking system.  No bank failed and consumer panic did not materialize.  The government engineered a “soft landing” for the ruble, allowing citizens to adjust to the new reality and giving businesses the time to adjust their balance sheet mix.  Money was pumped into Vnesheconombank to refinance foreign-held corporate debts, ensuring the solvency, at least for now, of some of Russia’s largest corporations.  Government procurement has been accelerated, some protectionist measures for domestic producers enacted, and taxes reduced, including the corporate profits tax from 24% to 20%.  In December, the government enacted a third set of measures to support 295 companies of federal significance as well as another 1,500 companies operating at the regional level.

These measures have substantially reduced Russia’s currency reserves, which have dropped from $596 billion in mid-2008 to $382 billion as of February 26.  The vast majority of the $200 billion in reserve expenditures was dedicated to slowing the devaluation of the ruble.  On the basis of rapidly declining reserves and depressed commodity prices, Fitch cut Russia’s foreign and local currency ratings to BBB in January, following a similar move by Standard & Poor’s a month earlier, Russia’s first ratings downgrade in a decade.

Given the unprecedented nature of the crisis, many of the government’s actions are, by necessity, trial-and-error, much like the approach in the United States and other countries.  Also similar to the evolving U.S. approach, Russia is now looking at the opportunities this crisis presents to fundamentally transform the economy.  A new expert study issued by the Institute of Contemporary Development (INSOR), a think tank created by President Medvedev, called on the government to “prepare a route out of the current situation towards a new economic paradigm that will arise at the end of this crisis.  With the breakdown of the current system, room is made for a new system, the architecture of which still needs to be created.”

The full pdf of this edition of Policy Matters can be downloaded here.

Possibly related posts:

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2. Government Presents Budget Seeking Consultation and Consensus
3. Policy Matters: The New Tripartite Customs Union and the Implications for Trade and Geopolitics
4. Fighting the Crisis by Rebuilding Confidence
5. [The Crisis: Make Or Break Time for Key Relationships] Part II: Business and Government