In response to Standard and Poor’s downgrade of Russia’s credit rating to junk, the government has adopted a $35 billion anti-crisis plan. However, the document is ambiguous and the measures are unlikely to remedy the Russian economy.
On January 27, Russian Prime Minister Dmitry Medvedev signed a one-year anti-crisis plan that includes sixty measures to stabilize the domestic economy and to fulfill social and international commitments. The resources for implementing this plan will be drawn from the federal budget as well as the country’s National Welfare Fund.
The Russian government is hopeful that this emergency measure will help balance the budget and achieve a positive economic growth by 2017.
With Russia recently plunged into a deep recession as a result of slumping oil prices and Western sanctions, the conflict in Ukraine has amplified the long-standing structural weaknesses of the country’s economic model. As Russian Finance Minister Anton Siluanov estimates, the cost of this has crisis already surpassed $200 billion.
Additionally, last week S&P downgraded Russia’s credit rating to ‘junk’. Although the Russian government dismisses the decision as political and argues that it will have a limited impact on its public financing costs, it could have a detrimental effect on the Russian market in the event that the other two major rating agencies decide to also downgrade the country’s rating to non-investment.
Amid these considerations, experts have already agreed that the economic hardship will persist in the long-term. Therefore, the anti-crisis plan is attempting to address Russia’s economic recession as well as to shape investors’ expectations.
Will it work?
There are good reasons to be skeptical about the newly developed economy plan, as it is excessively ambiguous. Indeed, Ivan Tchakarov of Citibank argues that the program is inevitably vague as Moscow has yet to revise its budget and macroeconomic forecasts for this year.
At the time of writing, the plan lacks a clear evaluation of its expected cost, as only 22 of 60 measures have been assessed to their cost. Therefore, as the adoption of the economy plan was rushed, it may turn out significantly more expensive than announced last week.
Experts point out that the proposed measures are generally similar to those put in practice during the 2008-2009 economic crisis, but the current recession has been brought about by a set of very different factors and the macroeconomic dynamic is markedly different.
First, for several months now oil prices have declined without a sign of recovery contrary to the previous crisis. Second, Russia’s usable currency reserves in 2008 were much higher. Third, the country is cut off from financial markets and has to rely exclusively on its domestic funds to restore its economy. In conclusion, the expected effect of the anti-crisis plan appears somewhat optimistic, as it lacks up-to-date measures.
Much of the planned expenditure will go to revitalize the Russian banking sector. This does not only prioritise the immediate financial gains at the expense of investing into the long-term economic development, but it also extends the risk that the financial instability develops into a wider economic crisis. Indeed, the proposed anti-crisis plan sets as the priority to stabilise the ruble.
As Ekaterina Arapova of the Moscow State Institute of International Relations (MGIMO) explains, the depreciation of the Russian currency is partly due to speculation. With market players not seeing better economic environment, negative forecasts will keep pushing the ruble downward.
Recapitalization of banks will also boost the supply of rubles on the market against a low demand for the currency. This will inevitably aggravate the inflation and will again lead to further devaluation of the ruble. Hence, the Kremlin’s anti-crisis plan lacks coherence and could lead to unwanted results.
What does this mean for investors?
Outlining the key objectives of the anti-crisis plan, Russian President Vladimir Putin announced that a provision to ensure the economic growth (one of the primary purposes of the newly signed plan) is to attract private investment. This is undeniably crucial for the Russian market, as investors pulled $152 billion out of the country last year, compared with an average of $57 billion annually during 2009 to 2013.
This capital flight has become one of the major factors in Russia’s deteriorating economic situation. Yevgeny Yasin, former Minister for the Economy, suggests that wider structural reforms are needed to reinvigorate the inflow of investments. The government needs, he notes, to focus on policies that would ensure that rights of investors are secured.
However, the anti-crisis plan tackles the most pressing current problems without addressing the root cause of the vulnerability of the Russian economic model. The weak investment climate and excessive bureaucracy are still there and no fundamental changes are in sight. Therefore, any current program proposed by the Russian government remains short of effective solutions for investors, significantly undercutting the relevance of developed measures.
As Alexander Deryugin, an analyst at RANEPA, puts it “the [anti-crisis] plan will certainly ease the situation, but it is aimed at addressing current, short-term issues, and none of those responsible for the current situation”. Indeed, the fact that the measures are ambiguous, partly outdated and the plan is inconsistent will impede the Russian authorities from tackling the current crisis in an effective way.
Private investors, crucial for Russia’s economy, will still be facing the same structural challenges even after the implementation of the anti-crisis plan. A more comprehensive and sophisticated program is needed to revive Russia’s economy and to improve its investment climate.