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Published in Stream:
Russia Update: January 13, 2016
Press by
The Interpreter
Russian-to-English translation journal, with original analysis and commentary on Russia's foreign & domestic policy.
Russian Leaders Prepare the Public for the Worst, As Social Hardships Likely to Grow; Kudrin Not to Return to Government
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As we've been reporting, the drop in the price of oil and the value of the ruble against the dollar have forced Russia to admit the need to re-calculate its budget for 2016 and to cut spending.
Despite the brief rally today, analysts expect the price of oil to continue to drop and impact Russia's economy.

A measure of the seriousness of the situation is that top Russian leaders were not generally trying to spin events as positive, but are attempting to prepare the public for the worst turn of events.

Aleksei Ulyukyaev, minister of economic development, said his ministry is preparing a "stress test" for a scenario where oil could fall to $25 a barrel, even though he said it was "premature" to revise the budget for 2016. reported

Finance Minister Anton Siluanov said at the seventh annual Gaidar Forum today:

"In the current difficult conditions, we have to speak of a very economical, hard budget policy so as not to slide into a high rate of deficit and not slide into more volumes of debt."

He said Russia's cost of borrowing was too high now and the budget had to be changed.

"If we don't do this, the same thing will happen as in 1998-1999, when the public, through inflation, will pay for what we didn't do within the framework of bringing the budget into accordance with the new realities."

At the Gaidar Forum today, Prime Minister Dmitry Medvedev said Russia had to prepare for the worst:

"The accumulated reserves enable the balancing of the budget for the current year. But if the prices of oil will go on falling, the parameters of the budget will require correction. This must be understand, it is necessary to prepare for the worst."

Finally at a government meeting today, President Vladimir Putin himself called on government agencies to be ready "for any development of the situation," reported.

"I want to draw your attention to the fact that the situation is changing in the markets," he said, saying he had discussed the situation with Medvedev.
"We must be prepared for any development of the situation, to have scenarios for the development of the Russian economy for any option."

Even with these dire pronouncements, of all the leaders, Putin still has exhibited a tendency to try to make lemonade out of lemons. In his interview with Bild this week, he said the fall in oil prices was actually a healthy corrective for the Russian economy:

"Everything can be bought for petrodollars. And when the income from them is high, then there is a de-stimulation of our own development, especially in the high-tech branches of industry." He said Russia still had a high level of reserves and that he expected to "emerge to stabilization and a rise in the economy."
And at today's meeting he said, with his acknowledgements that "this does not mean that we should change anything drastically now."

Meanwhile Aleksei Kudrin, former minister of finance, called for uniting Russia's Reserve Fund, currently at 3.93 trillion rubles and the Fund for National Welfare, currently at 4.78 trillion rubles or a total of $113 billion and RIA Novosti reported.

"Today there is practically no difference, second, we have problems already starting with the pension system at full growth. They [the funds] are managed practically the same, with the exception of a small part which can be transferred to some institutions for developments. The Reserve Fund and the Fund for National Welfare should be merged since the challenges which we have in the coming two to three years exist...and they must be managed with a unified instrument."
He recalled that the two funds emerged as a result of the separation of the Stabilization Fund into the Reserve Fund to maintain the volume of reserves and the Fund for National Welfare to compensate for the financial losses in the Pension Fund.

There have been repeated rumors that Kudrin himself may be selected for some role in the government to help manage the crisis, but this appointment has not come about and the government has continued to deny it.

Today, Kudrin himself said "I am not returning anywhere, I have long since stopped commenting on this topic. I think any sort of newspaper canards overtake all possible events," Vedomosti reported.

It's important to remember that even before the war in Ukraine, Western sanctions and the fall in the price of oil, Russia was headed for trouble due to Putin's populistic promises after his election in 2011 and heavy deficit spending in Russia's region.

Last February, Vyacheslav Volodin, deputy head of administration, convened a three-day conference with Russia's provincial governors and released a report that was part a political rally stressing patriotic -- and anti-Western -- themes and partly an anti-crisis plan

At that time Prof. Natalya Zubarevich of Moscow State University, an economic geographer, told that the deficit for provinces tripled to 642 billion rubles ($9.5 billion) in 2013 when the regions went into debt to fulfill Putin's post-election populist promises. 

Since then, other crises from labor unrest, such as the truckers strike over anticipated road tolls and fines, to regional weather disasters have combined to create even more problems for the provinces.

Vedomosti had an even more frank report on Kudrin's remarks than, noting that of three structural faults of the Russian economy now  -- the issue of state versus private property, lack of competitiveness and efficiency with the dependency on oil, and social welfare, the third issue would prove to be the most explosive. 

The budget has no capacity to raise social support, but its maintenance at the current level will mean a rise in poverty, Kudrin stated.

"I am for a socially-oriented state. Now we are saying that we will fulfill all the social obligations, but at the same time, the number of poor people will grow." He characterized the claims the government was making of such a "social orientation" to be "populistic slogans."

In European countries, the GDP is twice the level of Russia's, although the tax rate is somewhat higher; Russia would have to have the same kind of growth to increase the tax burden -- and that means burdening business, which has already had to cope with the ruble crash and bans on imports. The pension age would have to be raised even further.

Kudrin cited some stark figures based on official statistics: the number of people below the poverty level in 2016 was 14.1% of the population versus 12.6% for the previous years, as people saw their real incomes drop. While the indexing of wages to inflation is built into Russian law, as parliamentarian Olga Batalina pointed out in the meeting, the issue is the amount it will be set at. The government plans to reduce 10% more expenditures and may refrain from indexation, said Vedomosti.

Russians are already seeing the practical result of existing inflation rates in their food basket; the price of cucumbers has risen 9.2%, tomatoes, 3.1%, eggs 0.8% and sugar 0.4%.

-- Catherine A. Fitzpatrick