Russia calls for calm as budget cuts loom

Russian government officials have appealed for calm after predicting budget cuts and a further surge in inflation as the country faces its worst economic downturn in 15 years.

With the currency and economy wilting under the twin blows of Western sanctions and a fall in the price of oil exports, finance minister Anton Siluanov proposed slashing 10% from most areas of the state budget.

That is a significant turnaround for the government of president Vladimir Putin, who only weeks ago told the nation in a televised address that state spending would not be cut.

Many parts of the economy, which relies heavily on public spending, will be affected, though Russia’s vast military modernisation programme and spending on infrastructure reforms will remain untouched as the country tries to reassert its power in the face of the West.

That means Russians, who have seen the cost of imports jump after the rouble’s fall, can expect more increases in the cost of living.

Inflation could hit an annual rate of 17% in the spring, deputy economic development minister Alexei Vedev was quoted as saying by the Tass news agency. Last year, inflation was 11.4%, the highest rate since 2008.

The Russian rouble, which lost about half of its value last year, was down another 1% in afternoon trading in Moscow, to just above 66 roubles per dollar.

Russia’s central bank has acted to stabilise the rouble and limit inflation. It raised interest rates sharply last year and intervened directly in currency markets. Higher rates, however, will hurt the domestic economy as they make borrowing more expensive.

While government spending will still rise overall this year, it will do so only by 5%, as opposed to the previous plan for 12%, Siluanov said.

He said if oil prices average $50 a barrel this year, government revenues will be around $45bn lower than in an earlier budget plan. The price of international crude oil was below $47 a barrel yesterday, near a six-year low.

The World Bank has sharply downgraded its predictions for Russia’s economy, foreseeing a 2.9% contraction in 2015.

As its prospects darken, Russia is highly likely to see its bond rating downgraded to “junk” status by Standard & Poor’s in coming days, said economic development minister Alexei Ulyukaev. Speaking at a conference with Siluanov, Ulyukaev asked Russians not to panic. “In a crisis situation, the main thing is to preserve mental calm and most of all to think about your health and the health of your family,” he said.

Natalya Orlova, an analyst with Alfa Bank, said the government will be keen to direct cuts away from high-employment sectors if possible, and instead target new projects and services.


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