Putin Grasps at Straws as Economic Cures Fail to Impress

Updated on
Vladimir Putin
Russian President Vladimir Putin delivers a speech during his annual address to the Federal council at the Kremlin in Moscow on Dec. 4, 2014. Photographer: Vasily Maximov/AFP via Getty Images

Russian President Vladimir Putin’s recipe for riding out an economic storm has a whiff of panic, say analysts from Moscow to London.

The measures, announced yesterday in a 70-minute Kremlin speech to lawmakers and top officials, ranged from a proposed tax and legal amnesty for those repatriating capital to a four-year moratorium on tax increases. That’s too little, too late, say analysts at banks including VTB Capital and Danske Bank.

The Russian leader is trying to revive an economy battered by a tailspin in oil prices, a plunging currency and sanctions imposed by the U.S. and its allies over the conflict in Ukraine. With the country walled off from foreign funding and sapped by capital outflows, Putin needs to harness the billions stashed away in low-tax offshore jurisdictions in the years following the Soviet breakup in 1991.

The amnesty initiative “pretty much smells of desperation,” Lars Christensen, the chief emerging-markets economist at Danske Bank A/S, said by phone from Copenhagen. It’s “completely unlikely to have any impact.”

The market wasn’t buying it either. The ruble retreated about 2 percent yesterday, reversing earlier gains of as much as 2.3 percent after the central bank reduced the rate it charges lenders for dollars to ease a cash crunch exacerbated by the sanctions. The benchmark Micex Index decreased 1.5 percent.

While the Micex slipped a further 0.8 percent as of 1:46 p.m. today in Moscow, the ruble strengthened 1.6 percent against the dollar.

Rekindling Growth

To jumpstart the country’s economic growth and push it above the global average in three to four years, Putin called for a supervisory “holiday” for small businesses, “harsh” measures to punish speculators attacking the ruble and money from the National Wellbeing Fund to be channeled to major banks to finance infrastructure projects. He also urged greater efficiency in government spending and state companies’ costs.

“These proposals would have been taken positively in the ‘‘normal’’ environment, but in the current environment of local economic stagnation and deteriorating global environment, they’re not strong enough to overcome the scale of global risks,” Natalia Orlova, chief economist at Moscow-based Alfa Bank, said by e-mail.

Bashneft Case

Billionaire Vladimir Evtushenkov’s travails with AFK Sistema is one reason economists may question Putin’s bid to lure back capital. Evtushenkov has been under house arrest since Sept. 16 on charges linked to the investment company’s purchase of shares in oil producer OAO Bashneft. A Moscow court has ruled in favor of nationalizing the billionaire’s stake.

Investors are making for the exits. Net capital outflows are set to surge to $125 billion in 2014, more than the $100 billion predicted earlier, according to the Economy Ministry. That would be the highest annual total since 2008, when $133.6 billion left the country, according to central bank data. That’s in addition to $418 billion in capital outflows in 2008-2013.

“A total capital amnesty is interesting, but given the scale of skepticism among the business community, there are doubts as to whether it can become a real game-changer,” said Vladimir Kolychev, an analyst at VTB Capital.

De-Offshorization Push

Putin, who returned to the Kremlin in 2012 for a third term, has championed the “de-offshorization” of the economy, backing efforts to repatriate as much as $1 trillion in capital held by companies and high ranking officials abroad. Illicit capital outflows related to Russia’s shadow economy may have been as much as $211.5 billion between 1994 and 2011, according to Global Financial Integrity, a group that studies financial flows.

The central bank said it intervened to stem a plunge in the ruble on Dec. 1, the first time it’s stepped in since moving to a free float almost a month ago. It spent $700 million then, and $1.9 billion on Dec. 3. The authorities have the means to sway currency speculators and “the time has come to use these instruments,” Putin said yesterday.

His “verbal intervention will not prove sufficient unless the central bank actually uses all tools at its disposal,” said Piotr Matys, currency strategist at Rabobank in London. “The Russian central bank seems to be reluctant to conduct a large scale intervention.”

Ruble Plummets

The ruble has lost about a third of its value since Putin started his incursion into Ukraine’s Crimean peninsula in March, the most among 24 developing countries tracked by Bloomberg. The Bank of Russia has raised its main interest rate four times by a cumulative 400 basis points since March to rein in inflation and counter market turmoil.

Putin’s speech marked his first comments since the Economy Ministry acknowledged gross domestic product in the world’s biggest energy exporter may shrink in 2015. He said sanctions would act as stimulus for Russian industry, urged government support for struggling lenders, comments that boosted banking stocks, and vowed to free companies from bureaucracy.

“The speech can be considered successful and useful for entrepreneurship,” Anton Danilov-Danilyan, co-chairman of Delovaya Rossiya, a business lobbying group, said in an e-mailed statement. He called the tone “inspiring.”

Economy, Inflation

Russia must balance its goals to stimulate economic growth and restrain inflation, Putin said, calling for price growth to be brought down to 4 percent in the medium term. Consumer prices surged 9.1 percent from a year earlier last month, the fastest pace since June 2011, the Federal Statistics Service in Moscow said yesterday.

Putin’s economic-growth targets are “totally unrealistic” and the proposed capital amnesty is “definitely” a mark of Russia’s growing isolation, said Sanna Kurronen, a Helsinki-based analyst with Nordea Markets.

In trying to burnish Russia’s fading allure, Putin failed to account for the changes sweeping his country’s economy, according to Liza Ermolenko, an economist at Capital Economics in London.

“In a way it’s interesting because they still talk how they want to improve the business environment and help small and medium enterprises but they haven’t actually done anything on this front,” she said. “This remains just rhetoric.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE