World Economy

Russia Approves Tough Budget to Avert Sanctions

Russia Approves Tough Budget to Avert SanctionsRussia Approves Tough Budget to Avert Sanctions

Russia approved a fragile budget on Thursday that promises to cover generous social spending and control borrowing, but relies on high oil prices and reserves to try to overcome the economic damage of Western sanctions.

For months Russian officials have played down the impact of the punitive measures imposed by the European Union and United States over Moscow’s policy on Ukraine which have curbed access to foreign capital, hurt investment and sent the rouble to lows, Reuters reported.

But in the 2015-2017 budget, the tightest since the 2008 global crisis, the government may for the first time in six years be allowed to tap its rainy day reserves – a sign it will struggle to cover social promises by President Vladimir Putin.

Admitting that macroeconomic stability was a “fragile” thing, Prime Minister Dmitry Medvedev told his ministers the state will not borrow excessively and will keep spending tight.

“This is the first time when work on the federal budget, the three-year budget, took place in such difficult circumstances, when an economic slowdown was exacerbated by the implementation of sanctions,” Medvedev said.

“The main problem that we face today is the high level of uncertainty when it comes to how fast trust will return, how soon businesses become interested in investing, how the consumer market grows and what steps our partners will take.”

 Below Forecast

The economy is expected to grow 0.5 percent at best this year, down from forecasts of 2.5-3.0 percent at the beginning of the year.

The budget foresees a struggle to tame inflation and a falling rouble, and depends on an optimistic assumption for the price of oil, Russia’s main source of income, at $100 per barrel. Urals, the country’s chief crude blend, stood at around $95 per barrel on Thursday.

“It seems that the Russian government is quite comfortable with the oil price and with its reserves, but the proper effect of the sanctions comes with a lag,” said Vladimir Miklashevsky, an economist at Danske Bank.

At a meeting with senior officials, Putin said Russia’s best response to sanctions was to boost the domestic market.

The health of the Russian economy and the ability to supply the market with goods and cash has depended in post-Soviet years on investment, both foreign and domestic.

After returning to the presidency two years ago, Putin ordered the government to shake up state-run industries and to take measures to raise capital investment to no less than 25 percent of annual economic output in 2015.

But after sanctions, capital outflows are expected at $100 billion this year and capital investment is expected to decline by 2.4 percent.

Economy Minister Alexei Ulyukayev said the arrest of billionaire Vladimir Yevtushenkov on money laundering charges had hurt, not helped, Russia’s business climate. These marked the first critical comments by an official since the chairman of Sistema, a telecoms-to-oil conglomerate, was put under house arrest on Tuesday.