Russian anti-crisis plan targets a surplus by 2017
Russia undeterred by credit downgrade (Part 7 of 7)
Russia announces a $35 billion anti-crisis plan
On January 28, Russia’s (RSX) (ESR) finance minister, Anton Siluanov, announced a one-year $35 billion anti-crisis plan that aims to fix the Russian budget and achieve a surplus by 2017. The Russian government is also preparing to introduce certain structural economic reforms.
How Anton Siluanov will allocate $35 billion
As part of the plan, Russia will spend about $15 billion to recapitalize Russian financial institutions. Russia’s largest banks, including VTB OAO Bank, Gazprombank (OGZPY), and the Russian Agricultural Bank, have been looking to the state to help them meet the demand for loans in the country.
The Market Vectors Russia ETF (RSX) invests in VTB OAO Bank and Gazprom. It also invests in major Russian oil companies including Lukoil (LUKOY), Surgutneftegas OJSC (SGTZY), OAO Tatneft (OAOFY), and OJSC Rosneft Oil.
Another $740 million dollars will be spent on Russia’s agricultural sector to boost local production. This could lessen the negative impact of Western sanctions that have caused a shortfall in products coming into the country from elsewhere.
There will also be a proportional allocation to help small businesses in Russia.
Anti-crisis plan requires a 10% cut in government spending
According to the plan, the government will cut the majority of its planned expenditures by 10% in 2015. Defense, social spending, and debt repayments are to be spared the cuts.
Siluanov confessed that Russia would have to put certain projects on ice for the time-being to finance the anti-crisis plan. Yet, certain projects, such as what’s happening in Crimea, will go ahead as scheduled.
Can the anti-crisis plan help the Russian economy?
While the cap on government spending may be intended to cushion Russia from depleting reserves and flight of capital, it could have negative economic consequences in the long run. The introduction of spending limits would, in effect, curb infrastructure spending, which in turn would slow the pace of job creation in the economy. Because employment is a major driver of economic growth, it’s debatable whether the anti-crisis plan will do more good or ill for the Russian economy.
What’s more, the plan is based on an average rate of $70 per barrel for crude oil. Any deviation from this average is likely to see Siluanov’s plan veer off track.
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