Russia braced for more challenges

By James Melik
Business reporter, BBC World Service

The rouble has effectively been devalued by 50% since August

Russia's transition from a centrally-planned economy to free market capitalism has not been smooth, and the global downturn is providing yet another challenge with jobs being lost and wage payments being delayed.

President Medvedev recently indicated that he was not overly worried.

"Our financial and economic situation is absolutely stable," he says, "We amended the budget - it's a budget with a budget deficit."

"Nevertheless. using money from the reserve fund we'll be able to cover all our spending, including social spending and get through the most complicated period of the financial crisis."

Currency woes

The gap between what the government spends and what it earns - its budget deficit - is expected to rise sharply in 2009 to around $60bn (£42bn).

Moscow's revenues are sharply down because the the price of oil has plummeted due to a drop in global demand.

Oil prices are more than $100 a barrel below their peak in July 2008, whilst the rouble is now more than 50% below its record levels against the US dollar reached at the beginning of August.

Russia's central bank has spent more than $200bn defending its currency, opting to devalue gradually by widening the rouble's trading band, instead of making a single big devaluation.

"All the commodity currencies have devalued and the rouble is a laggard here," says Alexei Moisseev at Renaissance Capital.

The government needs to recognise it cannot hold back the tide James Fenker Red Star Fund Management

"There is a real chance it will help, it is a real alternative to a big one-off devaluation."

Butfund manager James Fenkner at Red Star Fund Management in Moscow, says the government should stop wasting precious reserves trying to prop up the rouble on the international money markets.

"What the government needs to do is recognise it cannot hold back the tide," he says.

"The oil price come down dramatically but the rouble has not. The central bank has lost an enormous amount of foreign reserves and letting the rouble drop would address some of the imbalances," he maintains.

Social unrest

In Vladivostock on the Pacific coast, Russian car importers demonstrated against tariffs on vehicles they bring in from Japan.

Although a devalued rouble makes imported goods more expensive. Mr Fenker points out that the Russian people have already been paying a heavy price for the government's economic policies.

In the last six months, industrial production in Russia has plunged by 20%.

Yegor Gaidar became prime minister just after the Soviet regime fell and is considered to be the architect of the modern Russian market economy.

Both the rich and the poor have been hit by the global economic slump

"The Russian economy is strongly dependent on the level of the oil price, gas price and metal prices," he says.

He adds that after the crisis of 1998 the government created significant quantities of foreign currency reserves and is optimistic that Russia is well prepared to deal with its current problems.

"When you have recessions in the world you have recoveries. That means commodity prices recover too," he says.

Slackers sacked

President Dmitri Medvedev has replaced four of the country's regional governors in a move thought to signal the Kremlin's concern that the economic slump could lead to social unrest.

A senior aide to the president, Vladislav Surkov, said the global crisis had accentuated the evaluation of the governors' performance.

President Medvedev had warned that he would not tolerate slackers or slovenliness.

"We aren't going to close eyes on flaws in work and, simply speaking, ineptness, sloppiness and carelessness of some officials," Mr Medvedev told state television.

With electricity prices rising by 21% and heating 14%, and people being laid off or being told to take unpaid leave, there is concern that the social unrest experienced in Vladivostok could spread to Moscow.

One commentator noted that although the latest budget will result in a deficit this year, there has not been any cut in the cost of funding the police or interior troops.

That perhaps, is the clearest indication that economical situation is not going to improve in the near future.

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