Putin Purse Tightening Hobbles Medvedev in Race to Deadline
President Vladimir Putin rejected calls for fiscal stimulus, limiting Prime Minister Dmitry Medvedev’s options as he races to meet a deadline for submitting a plan to revitalize Russia’s economy.
First Deputy Premier Igor Shuvalov said Putin dismissed proposals to aid flagging growth by boosting federal spending at a meeting with officials last week. That means any measures the government takes are unlikely to have a “significant impact” on growth this year, Shuvalov said in an interview in Moscow.
Putin is facing the weakest economy of his nine years in the Kremlin as he scales back pre-election outlays and Europe’s debt crisis curbs exports. Putin, 60, told Medvedev’s government last week to settle differences among officials and submit a revival plan by May 15, pointing to “alarming signals” that Economy Ministry Andrei Belousov warned may presage a recession later this year.
Russia’s $2 trillion economy doubled in Putin’s first eight years as president, when annual expansion averaged about 7 percent. Putin, Medvedev’s premier for four years, swapped jobs with his protege last May, after parliamentary elections sparked the biggest protests of his political career. Growth slowed to 2.1 percent in the fourth quarter, the weakest pace since a contraction in 2009, when Medvedev was president.
“Everyone agreed that growth of about 3 percent is not something to be satisfied with,” Shuvalov said in the interview. Even so, “the government will continue to work within the very strict limits on federal spending.”
The government is crafting a stimulus program “within the limits we can afford,” Medvedev said today at the annual Economy Ministry meeting, attended by central bank and Audit Chamber officials. Russia needs to curtail the state’s presence in the economy and develop its non-commodity industries, he said.
“We need to transition to a new model of economic growth,” Medvedev said. “Today it’s clear that without changes, our economy has no serious prospects for growth.”
Gross domestic product will expand 2.4 percent this year, according to the Economy Ministry, which has cut an earlier forecast for 3.6 percent growth. Measures to implement “structural modernization” of the economy can bring expansion to 6 percent a year in 2014-2016, Belousov said today. The government should consider channeling 200 billion rubles ($6.5 billion) to 400 billion rubles from the National Wellbeing Fund to infrastructure projects, he said.
With spending capped and incoming central bank chief Elvira Nabiullina pledging to keep the focus of monetary policy on subduing inflation, Medvedev has few options left to lift the economy, said Igor Yurgens, a Kremlin economic adviser during Medvedev’s presidency.
“Medvedev is in a very difficult position,” Yurgens, who heads the Insor policy research group in Moscow, said by phone April 27. “Many of the measures he could take, like improving the investment climate, depend on Putin. In this situation, the only thing he can do by May 15 is produce an honest and critical report on the current situation.”
Putin’s impatience with the government’s failure to meet its goal of 5 percent annual growth is not being felt by Medvedev alone. Putin threatened to dismiss all underperforming officials earlier this month, according to a video clip of an April 17 meeting he had with ministers and regional governors, which was leaked hours before Medvedev addressed parliament.
“If we don’t do this, we have to concede that either I am working badly or you all are working badly and you should go,” Putin said in the video. “I should inform you that as of today I am leaning toward the second option.”
With Europe struggling to rein in budget deficits, Russia introduced a so-called budget rule this year that caps public spending at a level linked to long-term oil prices.
The world’s biggest energy exporter gathers surplus revenue from oil and natural gas sales in its $84 billion Reserve Fund (RURFUSD) until it reaches 7 percent of gross domestic product, a level the Economy Ministry wants to cut to 5 percent to allow for the creation of a development fund for infrastructure spending.
Putin’s insistence on fiscal discipline has helped push the cost of insuring Russia’s debt against default to the lowest relative to emerging-market peers in more than six months.
The discount of Russia’s five-year credit-default swaps compared with a gauge of 15 developing countries widened to 55 basis points April 25, the biggest gap since October, and was at 53 basis points, or 0.53 percentage point, today, according to data compiled by Bloomberg.
Fiscal restraint hasn’t yet had the effect on inflation that the central bank would like after the government raised costs for items including alcohol and transport. Consumer-price growth reached 7 percent from a year earlier in March compared with a 6.6 percent advance in 2012. Bank Rossii’s target range is 5 percent to 6 percent.
Both Putin and Nabiullina, currently the president’s top economic aide, have said squeezing tariff increases for regulated industries such as electricity, natural gas and railway cargo may help curb price growth while promoting the kind of efficiency gains that benefit the economy as a whole.
Putin is right to target inflation first, said Evgeny Gavrilenkov, chief economist at state-run OAO Sberbank CIB, the investment banking unit of Russia’s largest lender.
“If Russia wants to be one of the world’s five biggest economies, inflation should be lower than growth,” Gavrilenkov said by phone in Moscow April 27.
Russians, who suffered bouts of hyperinflation before Putin came to power at the end of 1999, rank inflation as their second-biggest concern behind housing and access to utilities, according to a March 15 poll by the state-run All-Russian Center for the Study of Public Opinion.
Putin indicated during a live call-in television show last week that his stance on inflation is as much a political calculation as it is a purely economic stance.
While some government officials are critical of the central bank’s “overly tight” monetary policy, Putin said he supports it because “it’s aimed at subduing inflation,” which is in the interests of “citizens and the economy.”
While Putin’s policies may succeed in taming inflation, they will probably come at the expense of overall economic growth, according to Alfa Bank analysts led by Natalia Orlova.
Even if Putin replaces Medvedev with former Finance Minister Alexei Kudrin, “as the market expects,” Putin made it clear in his call-in show that economic policy will continue to have a “strong social focus,” Moscow-based Alfa Bank said in a note to clients April 26.
“Such an approach will not allow an investment-focused or business-oriented policy to be implemented effectively, which supports our view that Russia will continue to see slow growth in the coming years,” Alfa said.
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