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  Economic problems in Russia: will the castling help?

Vaiva Sapetkaitë, Institute of International Relations and Political Science Vilnius University
2013 08 22

The recent statistical indicators of the Russian economy showed that the country will soon face a new economic crisis. Lately we could observe strange arrangements in dealing with this danger – pushing the influential officials from one to another position.

Let‘s start from Alexei Ulyukayev, former Russian Central Bank first deputy chairman who has been appointed the economic development minister. And he will be the first to tackle public dissatisfaction. This is inevitable: the decision to cut social benefits would worsen life of Russian population. To leave the situation unchanged would not be right as well– the consequences might show up later. In view of this there are doubts on whether Alexei Lyukayev will manage to stay in the post of minister for long.

Alexei Lyukayev declared officially that struggle with the economic downturn will be one of his priority objectives. But he also mentioned the second objective: to ensure the implementation of Vladimir Putin‘s commitments to citizens declared in his articles in May 2012. Hardly will a newly appointed minister manage to reach this goal.  

Another replacement was related to the former economic development minister Andrei Belousov who was appointed advisor to President on economic issues. In his former position he was criticised for the idea to lower main interest rates of the banks since this should have encouraged citizens to take loans and increase consumption. The interest rate is really high, it exceeds 8 percent and it would be rather difficult to reduce it due to high inflation.

Another famous personality is Sergei Ignatyev, former head of the Central Bank of Russia. By the way, two years ago the magazine „The Banker“ elected him as the best head of the national bank in Europe. In Russia his is well known as the head who‘s been consistently fighting against political pressure. When he was replaced by former economic development minister of Russian Federation Elvira Nabiulina, the talks were heard that independence of the Central Bank will be undermined. Since Nabiulina was proposed by Putin, the worries do not seem unjustified.

Thus, despite the above adjustments radical changes are hardly possible.

One of the headaches of the Russian economic policy-makers is the unstable rouble. The recent sharp drop in the Russian currency frightened the investors. This reduced investment attractiveness of the country although it was not high before due to technical obstacles to business, unfavourable competitive environment, corruption, weak protection of the rights of the owners and other problems.

According to the Economic Development Ministry, in 2013 the net revenue to Russia should reach USD 15 billion, in 2014 – USD 30 billion and in 2015 – USD 40 billion. But this is not yet the case, since quite a lot will depend on Russia’s economic developments and on the ability of European countries to solve their economic problems, since the EU is the main Russia’s market.  

So far capital is slowly coming to Russia; moreover, it has been directed toward other states for a number of years. The necessity to stop this process is also highlighted by the Russian Government although positive results are not yet seen.

Reduced global oil and gas prices have also disserviced Russia‘s economy.  This made the country especially sensitive to fluctuations in the prices of energy resources, since it has become risky to be constantly dependent on oil.  

Problems related to inflation were not solved either. According to journalist I.Preobrazhensky (portal rosbelt.ru), the signs of the systematic economic crisis need systematic solutions but not newly printed rubles.

Regions which are heavily in debt are also facing system problems. According to the finance minister Anton Siluanov who is quoted in the portal gazeta.ru, during the two years period the regions will face another 1,34 trillion rouble loss which will be determined by the decreasing income tax. This will mainly affect the richest regions oriented toward metallurgy and oil.   

As we can see Russia is facing quite many problems. They will have to be tackled by the new-old faces of the national economic elite; yet so far it doesn‘t seem that this economic elite is ready to make painful decisions which in the long run could become useful for the country. For instance, one of the tools in tackling the devalued rouble could be currency devaluation, but in June Elvira Nabiulina said that this step is not envisaged.

In view of this, only partial reforms could be expected but they will hardly be effective.  If firm measures are not taken problems will become even more serious. One example: according to Russian Central Bank, the major concern is related to the growing foreign debt: during the first quarter of 2013 it has increased by USD 52 billion (8,3 percent) and reached USD 684 billion. It means that problems might become even more serious - situation cannot change if there are no changes in the assumptions.

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