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Russia Facing Inflation, Zero Growth

  • Peter Fedynsky

Russia is facing high inflation, slow growth, and a 40 percent drop in budget revenues as the global economic crisis lays bare the country's poorly diversified economy. Senior Russian finance officials presented the gloomy outlook at a hearing in the lower house of Parliament Friday.

Global economic crisis exposes Russia's financial weak spots

Members of Parliament listened as the finance minister and other top officials outlined how an unexpected and precipitous drop in oil prices has pummeled the Russian economy. Economic Development Minister Elvira Nabiullina told lawmakers that the global economic crisis has exposed a number of Russia's financial weak spots, including declining investment.

Nabiullina says investments were a motor of Russian economic growth, noting that 25 percent of them were financed by foreign capital. She adds that one-sixth of the investments were made by the Russian state, which relied on oil profits to fill the federal budget.

The minister says Russia has not had enough domestic sources of growth that could have softened the impact of the global economic crisis.

Nabiullina says the government increased budget expenditures for necessary items, but did not have time to eliminate infrastructure problems, or to modernize and diversify the economy by putting it on a path toward innovation. She hastens to add, however, that these things are being done and must be done.

Export revenues expected to decline

Finance Minister Alexei Kudrin says export revenues are expected to decline from $469 billion last year to $269 billion in 2009, amid falling foreign demand not only for oil, but also Russian metals and fertilizers. This, he says, will reduce the growth of Russia's gross domestic product to zero, compared with six percent in China, two percent in the United States and one percent in the Euro zone. Kudrin predicts U.S. and European inflation will be virtually zero, but warns of 13 percent price hikes in Russia.

Kudrin says that lower prices tied to lower demand are natural during a crisis, but that an opposite trend will emerge in Russia due to increased prices for imports linked to the devaluation of the ruble. He notes that Russia relies heavily on imports not only of consumer goods, but also technology, spare parts, and equipment purchased by Russian firms.

The Russian ruble has lost about 20 percent of its value since November.

The Finance Minister says the federal budget is expected to decline by 40 percent, from a projected $300 billion [10.9 trillion rubles] to about $185 billion [6.5 billion rubles]. Russia's 2009 budget assumed oil selling at $95 per barrel, more than twice its current price. Prime Minister Vladimir Putin has ordered the budget be revised based on a price of $41 per barrel.

Russia has spent about $200 billion, more than a third of its currency reserves since August, to prop up its economy, to shore up the budget and defend the ruble. Alexei Kudrin says he expects the economic crisis to end before the currency reserves run out.

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