Vladimir Putin gave his first report as a prime minister to the Duma on Monday, April 6 and scored - well, not an 'F' for fail, but certainly didn't get a pass grade either. Clearly, the country will have to stay in at the weekends and work a bit harder if it's to qualify as a success again.
The main takeaway from the speech was the marked change in tone: at the start of the crisis, the government was largely concerned with avoiding a systemic meltdown of the banking system, but this speech was delivered to the gallery to reassure the Russian population that the Kremlin will do all it can to ease the pain of rising unemployment and falling incomes.
Putin said the government will take whatever measures to ease the pain on the working population and announced a RUB3 trillion ($86bn) package to fight the crisis this year. "There was very little new in his speech. His comments were more aimed at the general public than the legislators," says Chris Weafer, chief strategist at UralSib.
Russia has moved onto the second phase of its crisis. The economic issues in the second half of this year will be dominated by what happens to the oil price and how fast bad loans grow on banks' balance sheets, but the main issue is how the Russian people take the pain inflicted by the slowdown.
Putin's power rests on an unspoken pact made with the Russian people: I give you prosperity, and you don't interfere with politics. Without his sky-high popularity ratings, Putin would not be able to face down the clans of Siloviki - those with ties to the security services - or oligarchs. But as the government official responsible for the performance of the economy, Putin finds himself in the firing line for the first time since the Kursk submarine sank in August 2000.
The picture that Putin painted in his report was mixed. The economy is stabilising, but production is still falling and unemployment still rising. Uralsib summed his main points as:
1. The country is facing a difficult 2009 for reasons not of its making;
2. The government is on top of the problem;
3. The government will take whatever measures required to minimize the effect of the downturn on the working population and those dependant on state support;
4. The state's priority is to protect workers, not companies;
5. The country, and the economy, is in good shape to survive the crisis.
While the first point is clearly true, it's not as clear that the government is on top of the problem. Indeed, the government has actually been slow to realise the magnitude of this crisis, assuming (wrongly) that the huge currency reserves would be enough for Russia to spend its way out of any downturn. After promising generous bailouts to companies in December and January, the state has been back-peddling furiously as it became increasingly clear even Russia doesn't have enough money to pay everyone's debt off. Now companies are being told that the state will rescue the most important as a last resort, but owners are now expected to try to sort out their problems for themselves. Specifically, the Kremlin has suggested that it will accept some debt-for-equity swaps in even the strategic sectors.
But the Kremlin has been caught with its shorts around its ankles. At the start of this year, the Social Ministry was predicting registered unemployment would hit 2.2m by the end of the year - a number passed at the end of March. The International Monetary Fund has specifically criticised Russia for concentrating too much on stabilisation and not doing enough (anything?) to boost growth.
Putin's "people not companies" comment is the kernel of this speech and shows the Kremlin is recalibrating, as the crisis has taken on a political dimension: in the first phase only the economy was threaten, but now rising unemployment is threatening their political power base.
Putin's last comment is not entirely true either. The Kremlin decision to allow a gradual devaluation of the ruble at the start of this year saw some $130bn of hard currency reserves transferred from the Central Bank of Russia (CBR) to companies and banks. This decision has effectively stopped the collapse of both the real and financial sectors. The money could be viewed as a stimulus package: except rather passing on this money to the real economy as credits, banks are hoarding every penny they get as they cash-up ahead of a crunch later this year if the sector gets overwhelmed with bad debts.
The Kremlin is clearly frustrated. After handing out about a fifth of its reserves, it was hoping to see a bounce. But now the money has gone, there is little the Kremlin can do to force the banks to use it. Hence, Putin made it very clear that any further bank support would be, "strictly tied to the benefits it lends to the real sector."
What happens to consumer confidence and oil prices in the rest of the year will determine the rate of recovery, as they are now the bedrock on which Russia's recovery is built. However, there are problems in almost every corner you look.
EXTERNAL DEBT: Putin crowed that external debt has been greatly reduced. Russia's external debt fell by about $57bn to $484.7bn by end-2008, accounting for about 40% of GDP. While the external sovereign debt is extremely low, some Russian companies have borrowed heavily abroad and face bankruptcy this year if help from the state is not forthcoming. According to Putin, Russian companies have decreased their external debt $174bn in recent months by repaying or restructuring it.
"This is hugely positive, in our view, as the CBR's official statistics show that only $47bn of private debt was repaid in the fourth quarter of 2008. In the first months of this year, banks have likely repaid another $18bn," say analysts at VTB Capital.
RUBLE AND INTEREST RATES: The beneficial effects of the devaluation of the ruble are starting to tell. Having lost some 35% of its value since the start of this year, the economy is starting to show the same first green shoots. Putin said interest rates could now be cut in the coming months, providing inflation continues to fall. "The current rate of the national currency considerably improves the competitiveness of Russian companies," said Putin.
Citibank is expecting the rate cuts to come sooner rather than later, thanks to unexpectedly good trade figures last week: "According to the CBR's preliminary estimates, in the first quarter the current account recorded a surplus of US$11.1bn and private sector net capital outflows moderated to $38.8bn. As a result, we expect the CBR to cut its refinancing rate, probably as early as this week, and the ruble to appreciate only moderately."
TAX: One of the key elements of this speech was that Putin has promised not to change major tax rates until 2011. The government should reduce the fiscal burden at times of crisis, said Putin, but went on to say he is against "rash moves to a progressive income tax rate" from the current flat rate. Putin has repeatedly promised to leave the flat-tax alone - the cornerstone of his pact with the Russian people. Taxes on companies will actually go up a bit as the government continues pension reform, as the current pension is insufficient and Putin said that even a crisis is not a good enough reason to abandon these changes. However, the government will delay an increase in the Unified Social Tax from 26% to 34% until 2011
TARIFFS: Putin referred to a potential complete freeze on tariffs as an "eye catching, but not always an efficient, decision," adding that monopolies would be forced to slash investment and reduce Russian equipment purchases if tariffs were frozen. The cut in export duties allowed oil companies to remain profitable, although according to the Ministry of Finance this cost the budget about RUB250bn in the fourth quarter.
STATE INTO CORPORATE CAPITAL: Putin also signalled a change in the government's attitude to participating in company's capital. Previously, the state's entry into a company was considered to be a last resort measure, but now Putin suggests that the government will step in and rescue any company considered to be nationally significant. "At the same time, he mentioned that the Bank for Development (VEB) could seize assets pledged as collateral for loans if companies were unable to repay them. This, in our view, applies mainly to strategic corporates," says VTB Capital.
BANKS: Those that have received state assistance will be obliged to report to the government on how and at what rates they have allocated the resources. The state will concentrate its resources on those banks most actively lending to the economy (almost exclusively state-owned banks). Putin also said that the state must promote, not force, consolidation in the sector. Also, that a switch could be made from "urgent" banking system stabilization to a large-scale increase in bank resources, which should be made easier as falling interest rates and inflation will bring down the cost of capital.
FIRE FIGHTING AND STIMULUS: Putin said there is a RUB125bn special reserve in the budget for urgent measures. The State will increase the financing of transport infrastructure RUB100bn compared with 2008 to RUB560bn. Federal budget support to the regions will be increased 36% from 2008 to RUB1,200bn. The crisis should not "demoralise" Russians and the government has set aside an additional RUB600bn for social support. The state is to contribute RUB60bn to the capital of Russian State Mortgage Agency, and will spend RUB440bn on construction (up from RUB249bn in 2008).
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