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Russia Said to Weigh $2.8 Billion of Budget Cache for Crimea

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March 26 (Bloomberg) -- Russia may direct at least $2.8 billion of emergency budget reserves this year to subsidize Crimea, the peninsula it annexed from Ukraine, according to two people with knowledge of the plans.

The government estimates 100 billion rubles ($2.8 billion) to 130 billion rubles are needed to support Crimea and the port city of Sevastopol, home of Russia’s Black Sea Fleet, the people said, asking not be identified as planning is confidential. The amount may swell to 260 billion rubles to raise state pensions and salaries to Russian levels, one of the people said.

President Vladimir Putin, facing the weakest economic outlook since 2009 and first-quarter capital outflows that may exceed the level for all of last year, defied the U.S. and European Union’s threats of sanctions to absorb Crimea, a predominantly Russian-speaking region. Putin last week ordered Crimean pensions to be increased “without delay.”

“The spending increase intensifies pressure on the budget,” Evsey Gurvich, head of the Economic Expert Group think tank, said by phone today. “The budget this year is tight but it can be managed.”

The government is considering dipping into rainy-day money written into the budget to stem the impact of any economic crisis this year, according to the officials. The reserve, set at 344 billion rubles, contains pension savings transferred to cover this year’s pay-as-you-go funding gap, they said.

Anti-Crisis Reserve

The reserve now contains about 243 billion rubles after the allocation of 100 billion rubles to support small businesses and kindergartens, Finance Minister Anton Siluanov said today in an interview on state television. That amount may be used for Crimea, he said, without giving a time period.

The Finance Ministry is waiting for spending estimates from all government agencies and will present its final budget projections in mid-April, they said. The ministry declined to comment, as did Prime Minister Dmitry Medvedev’s spokeswoman, Natalya Timakova.

In addition to the subsidies, the government estimates Crimea will need investments including $3.8 billion for transportation and recreational facilities, Deputy Economy Minister Alexei Likhachev said on March 19, without specifying the period.

Russia already plans to spend at least 50 billion rubles to build a bridge across the Strait of Kerch to connect the peninsula to Russia’s mainland and may build an underwater tunnel, according to Transport Minister Maxim Sokolov.

Further Sanctions

Crimea and its port city of Sevastopol may run fiscal deficits of about 55 billion rubles this year, which Russia’s budget will cover in full, Siluanov said last week.

Russia had a budget surplus of 30.5 billion rubles, or 0.3 percent of gross domestic product, in the first two months of the year, according to Finance Ministry data.

Even before the standoff over Ukraine, the most serious since the Cold War, Russia struggled to revive economic growth, with consumer demand failing to make up for sagging investment. Growth will lag behind the government’s 2.5 percent estimate this year, Siluanov said on TV today. Morgan Stanley last week cut its Russian growth forecast for this year to 0.8 percent, while VTB Capital said the economy may not expand at all.

Capital Outflows

Capital outflows may reach $65 billion to $70 billion in the first quarter, spurred by strained ties with foreign governments, Deputy Economy Minister Andrei Klepach said March 24. That compares with $63 billion in all 2013.

U.S. and European officials have said sanctions are already biting. Investors pulled $5.5 billion from Russian equities and bonds this year through March 20, approaching the total outflow of $6.1 billion for all of 2013, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.

The Micex stock index gained 1.9 percent today in Moscow, extending its rally to 9 percent since Crimea’s March 16 disputed referendum on seceding from Ukraine. That was followed a day later by the U.S. and EU’s first round of visa bans and asset freezes targeting government officials. The gauge has declined 10 percent this year.

The U.S. and EU have expanded their sanctions lists, threatening harsher steps to deter Putin from taking over eastern areas of Ukraine, and Russia was suspended from participating in the Group of Eight. Russia has troops massed along the border with its smaller neighbor.

U.S. senators yesterday agreed on legislation that would combine aid to Ukraine with sanctions for Russians and Ukrainians deemed responsible for corruption and violence, after Majority Leader Harry Reid abandoned a provision that would have boosted the U.S. quota for the International Monetary Fund.

To contact the reporters on this story: Evgenia Pismennaya in Moscow at epismennaya@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Torrey Clark, Paul Abelsky