Russian economy sputters, government struggles to cope

The Russia economy is sputtering, and the government is considering a number of emergency measures as conditions worsen.

In a conference on Tuesday, Russian President Vladimir Putin claimed that recession in Russia has bottomed out. “We have reached the bottom of the trough,” Putin said, adding that about $5 billion in foreign direct investment (FDI)  had flowed back into Russia in the third quarter.

Putin did not address the question of what the Russian intervention in Syria was costing the government. But Russian Finance Minister Anton Siluanov told the press on Oct. 2 that the Russian military operations in that country would not require additional budget expenditure.

But FDI actually dropped by $20 billion in the first half of the year, according to a note published by investment bank Lazard analysts on Oct. 7. Moreover, FDI consisted almost entirely of reinvested profit, not fresh investment, the note said. “This reflected high risk perceptions and due to policy uncertainty and weak growth prospects.”

Moreover, there was $18 billion in capital flight in the second quarter, the note said. Total capital flight since 2010 was about $400 billion, according to World Bank statistics.

Meanwhile, Western sanctions imposed for Russia’s role in the Ukraine conflict continue to limit access by Russian companies to international finance. The World Bank forecasts that Russia’s GDP will contract about 3 percent in 2015, and that inflation, currently at 15.7 percent, will remain high through the end of the year.

Domestic demand has declined sharply, as consumers tighten their belts and shun imports, made expensive by the low value of the ruble, the World Bank said in a report released on Oct. 9.

The ruble remains in freefall, down about 40 percent to the dollar this year. “In September, the ruble continued to depreciate, though moderately, reflecting the sharp oil price drop in August. The average ruble exchange rate depreciated by about 2 percent with respect to the dollar in September, following the 4.9 percent drop in August, realigning the exchange rate with the oil price,” the World Bank report said.

As a result of lower incomes, the poverty rate increased significantly in the first half of 2015, the World Bank said. The number of poor people rose from 18.9 million (13.1 percent of the population) to 21.7 million people (15.1 percent of the population). “This accelerated an already troubling trend in poverty rates, which rose from 10.8 percent in 2013 to 11.2 percent in 2014. The increase in poverty rates was driven by the decline in real incomes but also by food inflation continuously outpacing headline inflation.”

Reforms proposed

Faced with slow progress, Siluanov is proposing a series of reforms.

He plans a series of exports promotions, for example, in an attempt to create demand for other products besides oil and gas, Siluanov told CNBC in a televised interview on Tuesday.

Then, interest rate subsidies are proposed to help businesses to obtain loans that they can afford.

The government also plans to support locally produced consumer goods, to make them competitive on the domestic market, Siluanov said.

Siluanov has called for increasing the retirement age to 65 from 60 for men, and to 55 from 50 for women. He did not provide details on how much additional revenue this would provide, but said it would support economic growth as labor participation declines due to an aging population.

He has reportedly also proposed putting a cap on the ruble’s exchange rate with the dollar, so that the currency cannot appreciate too much against the U.S. currency.

As details of these proposals are not yet available – the Russian government is still working on them all – analysts could not evaluate how effective any of them might be.

But the challenge is daunting, Siluanov admitted. “We face very complex tasks, but I hope next year we will achieve positive growth rates,” Siluanov said.