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Slowing Russian Growth Brings State-Aid Pledge
Thursday, 20 November 2008MOSCOW – President Dmitry Medvedev warned that the crisis gripping Russia’s banks and capital markets has spread to the real economy and pledged to use the Kremlin’s still-massive oil wealth to provide more state aid for stricken industries.
His comments, his frankest on the subject yet, came as the World Bank cut its growth forecast for Russia next year by more than half because of the country’s acute dependence on oil prices. The bank said it expects the ruble to keep softening as it tracks oil prices lower.
“It’s not a question of if; it’s a question of how it will happen,” Zeljko Bogetic, the World Bank’s chief economist in Russia, said of the ruble’s decline. Russian officials have ruled out a sharp devaluation, but have increasingly hinted that the currency could be allowed to weaken slowly.
Earlier this year, government officials were touting a strong ruble as a symbol of Russia’s economic resurgence. But the currency has fallen by 5% against a dollar/euro basket since August, and Russia’s central bank allowed it to weaken by 1% last week, triggering speculation that it will be allowed to slowly shed value.
The global financial crisis hit Russia later than it hit the West, gaining real momentum only when global oil prices crumbled. Since May, the country’s two leading stock indexes have plunged by around 70%. Some of the country’s wealthiest individuals have lost billions of dollars of wealth on paper.
The construction, real-estate, and financial-services sectors were the first to suffer, but until now the government has insisted that large parts of the real economy were insulated. Mr. Medvedev said that is no longer the case.
“Today it is clear that the crisis is spreading, unfortunately, from the financial sector into sectors of the real economy,” he told reporters in the town of Izhevsk, an arms-manufacturing center. “Every industry is affected in its own way. It is impossible to say that one among them is sitting pretty.”
Mr. Medvedev said the government is willing to keep using its reserves, the third-largest in the world, to boost liquidity and bail out troubled industries. He said the Kremlin has yet to decide on a final figure for its bailout package. So far, it has pledged more than $200 billion in loans, tax cuts, and other measures.
“We understand perfectly well that the scale of the problem is such that it is possible further measures will need to be undertaken,” Russian news agencies cited Mr. Medvedev as saying.
The central bank’s reserves stood at $475.4 billion on Nov. 7 but have shed $122.1 billion since their peak in early August as the government has spent heavily to support the ruble.
At the same time, capital flight has been increasing as investors have continued to pull back, a retreat that began last summer. Central-bank statistics show $83 billion in net outflows in the past three months while October saw a record monthly outflow of $50 billion.
The World Bank praised the Kremlin for its swift and thorough response to the crisis even as it said more efforts are needed. It forecast that falling oil prices would more than halve Russia’s current-account surplus to around $40 billion in 2009 from $100 billion this year.
But it said Russia is much better placed to weather the crisis than many emerging economies because of its carefully husbanded oil and gas wealth.
Ukraine, for example, had to appeal to the International Monetary Fund for a $16.4 billion aid package to help honor foreign payments after plunging metals prices deepened its current-account deficit.
The World Bank said it expects Russia’s economy to grow 6% in gross domestic product terms this year and 3% in 2009, down from its previous forecasts of 6.8% and 6.5% respectively. Its estimates are based on an annual average crude-oil price of $101.5 a barrel in 2008 and $74.5 a barrel in 2009. On Tuesday, oil prices were hovering at just over $50 a barrel.
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