Russia reacts to recession with protectionism

By bne IntelliNews December 15, 2008

Ben Aris in Berlin -

Russia officially went into recession on December 12, the day after the government announced a range of protectionist measures designed to shelter Russia's strategically important agricultural sector from the worsening economic situation.

Deputy Minister of Economic Development Andrei Klepach said that a recession has started in Russia, which may last more than two quarters, and that the country's real GDP growth is unlikely to reach the government target of 6.8% in 2008. Growth had already fallen to 6.4% by the end of the third quarter of this year and banks like VTB Capital have cut their end-of-year forecast to 6.4%.

Russia is following most of the world's economies into recession. Moody's Investors Service said in a report released earlier in December that, "global economic stagnation following the current disruptions in international financial markets is the most likely scenario for 2009 and 2010." But Russia remains better placed than many other countries to weather the storm, thanks to its large currency reserves; Moody's also confirmed Russia's outlook as stable on Friday, though Standard & Poor's downgraded the sovereign rating in December with a negative outlook.

However, there remains great deal of uncertainty over what will happen next year. Everything depends on where oil prices settle and how well the government manages a controlled devaluation of the ruble over the next few months. "Next year's GDP growth could range from negative 5% to plus 5%, depending on what happens to oil prices and the steps taken by the Russian government," says Yevgeny Gavrilenkov, chief economist at Troika Dialog.

While many pundits have speculated that oil will settle at between $60 and $70 a barrel in 2009 following production cuts by Opec and Russia, this is starting to look like the optimistic scenario: Goldman Sachs reckons oil prices will be dragged down by a collapse in global economic activity to $30 next year.

Putting up barricades

Clearly, next year is going to be tough and the Kremlin has already moved to protect some of its most vulnerable sectors.

Despite a bumper harvest this year that netted over 103m tones of grain as of the start of December, Russia's agricultural producers have been amongst the hardest hit by the crisis; farmers are heavily dependent on credit thanks to the seasonal nature of their job.

Russian farmers have already seen profits fall by a third this year and will need to borrow a massive RUB860bn ($31bn) in 2009, Deputy Agriculture Minister Nikolai Arkhipov said December 11. As no government can afford to see food production fail, the Kremlin has already said it will cover any funding shortfalls. Currently, farmers already owe RUB1.2 trillion and can't function without credit.

To make sure Russian farms can find markets for their goods, the Kremlin cut poultry quotas on December 11 and hiked the duties on imports on pork imports above quota levels to 75% of the customs value. The duties for poultry were likewise raised to 95% for imports beyond the quota levels, which will hurt US producers particularly hard as Russia is a big market for them.

At the same time, the Kremlin opened talks to source more foodstuff from Belarus, its tiny neighbour to the west, and offered other countries loans to finance exports of Russian grain to support prices for Russian producers.

Food producers may be hurting, but the makers of agricultural equipment have seen their markets completely collapse. Prime Minister Vladimir Putin was on a tour of Rostselmash agrarian machine-building plant in Rostov-on-Don on December 11 and said it was, "working like a warehouse."

"In October, producers felt the impact of the global financial crisis. Payment capacity plummeted as banks reduced loans," Putin was quoted by newswires as saying. "Sales of agricultural machinery in Russian regions virtually came to a standstill. We made a tour of the plant - it is overflowing [with machinery]."

The Kremlin is clearly very concerned by the slowdown in the agricultural sector. The minister's predictions that Russia will enjoy another bumper crop next year are being pooh-poohed by analysts who say that not only is the lack of snow this winter a problem, but they expect a lot of small farms will go bust in the spring; the Rostselmash factory has already sacked 1,000 employees more than the initial 300 it said were for the chop a month ago.

The knee-jerk reaction has been to slap more duties on imported equipment to protect Russian producers. Putin proposed a temporary 15% customs duty on imports of agricultural equipment, although parts for machines already in Russia will be exempt. "I think that it is possible during the financial crisis to support domestic producers of agricultural equipment by raising customs duties on imports of new and used agricultural equipment for a period of nine months," Putin said at a government meeting.

Russia's Industry and Trade Ministry says it could spend between RUB300m RUB500m next year to subsidize interest payments on loans of Russian agricultural equipment producers to upgrade their production facilities. The government will also give RUB25bn to Rosagroleasing, a state company that leases out agricultural equipment as ways to keep machine makers afloat.

The protectionist barriers have been applied to agriculture first, but there are signs other sectors will also have walls built around them in the coming year. This summer, Russia became the largest car market in Europe, overtaking long-time champion Germany. However, the domestic producers are slowly losing their market share to imports; in December Russian government released details of new car import duties, which will come into effect in early January.

"Prohibitive duties will be applied to vehicles more than five years old - the previous threshold was seven years. The duties for new cars (up to 3 years old) will increase 5% to 30%, while the duty for 3- to 5-year-old cars is set at 35% (up from 25% previously). At the same time, the government has significantly increased the minimum duty requirements - the minimum charge per cubic cm of engine volume," say analysts at VTB Capital.

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Russia reacts to recession with protectionism

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