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Russia Forecasts a Recession in 2015, Signaling a Toll From Sanctions and Oil Prices With Russia on Brink of Recession, Putin Faces ‘New Reality’
(about 9 hours later)
MOSCOW — After months of insisting that Russia can weather sanctions and plunging oil prices, Moscow for the first time is acknowledging that the economy could fall into a recession next year. MOSCOW — President Vladimir V. Putin grew wildly popular by making Russians richer every year and by vowing to restore their country’s great power status. But now, with the government predicting Tuesday that the battered economy will fall into recession next year, that formula is in jeopardy.
The Ministry of Economic Development, which publishes the government’s economic outlook, on Tuesday revised its forecast for 2015 to show a contraction of 0.8 percent, compared with a previous projection of 1.2 percent growth. Every day brings a barrage of woeful economic news. World oil prices just hit a five-year low. The Russian ruble is down 40 percent against the dollar so far in 2014. Inflation is due to rise 9 percent this year and to continue climbing. Capital flight is expected to reach $128 billion.
The combination of sanctions and plummeting oil prices is catching up with Russia’s economy, wobbly in the best of times because of its heavy reliance on commodity exports. The Kremlin suffered the collapse of the Soviet state and a government default during previous extended declines in oil prices, so the changing fortunes potentially pose extreme challenges. Experts underscore, however, that the country is far more resilient now than in the 1980s or in 1998, the previous times of crisis, particularly its stout private sector.
In the face of the weakness, the ruble has been in a free fall, driven by Russians’ fears of economic isolation and their eagerness to change rubles into dollars or euros to move wealth out of the country. Mr. Putin has already shelved planned megaprojects, like the South Stream pipeline to ship gas to southern Europe, which was canceled on Monday, and a high-speed railway from Moscow to Kazan, a city east of the capital.
The ruble opened at 52 to the dollar and slipped to around 53 in trading on Tuesday. So far this year, the ruble has fallen more than 40 percent against the dollar. Some analysts say the changes may be felt in the policy area, where Mr. Putin may feel compelled to tone down his aggressive, anti-Western stance. But others worry that he may do just the opposite, saying that his need to divert attention from economic problems might inspire further nationalistic adventures abroad, akin to the annexation of Crimea.
Also boding ill for the Russian economy was the announcement on Monday by President Vladimir V. Putin that he would scrap plans for South Stream gas pipeline. The project, once intended to establish the country’s energy dominance in southeastern Europe, fell victim to Russia’s increasingly strained relationship with the West. “It is a completely new reality for him,” Sergei M. Guriev, a prominent economist who fled into exile last year, said of Mr. Putin. “Whenever Russia wanted the oil price to go up, it has gone up. He has always been lucky, and this time he is not lucky.”
More policies shifts could follow. The Russian economy has a history of making hairpin turns from growth to sharp decline, imposing sudden and wide-ranging limitations on the country’s foreign and domestic politics. Russia is heavily dependent on oil, which constitutes some 60 percent of its exports. With the collapse in prices coinciding with severe economic turbulence caused by Western sanctions over destabilizing Ukraine, Mr. Putin risks losing the engine that was supposed to power Russia back onto the world stage.
The economic woes show little signs of easing anytime soon. Financial experts say Russia’s most pressing problem is not the sinking ruble, despite its potential to prompt a run on the banks, nor the falling price of oil, though the annual budget was based on a price of $96 per barrel, which is now hovering around $70.
Western sanctions over Russia’s annexation of the Crimean Peninsula and backing of rebel groups in eastern Ukraine have crippled Russian banks by restricting them to short-term credit. “This is all peanuts compared to the financing crisis,” said Vladimir Milov, a former deputy energy minister turned opposition politician.
The weakness in oil prices, now around $72 a barrel, is complicating matters. Oil and natural gas make up about 60 percent of Russia’s export earnings. Nearly $700 billion is owed to Western banks, economists said, much of it by the giant state-run companies that constitute the heart of the Russian economy. But sanctions imposed by the United States and Europe over Russia’s annexation of Crimea and adventurism in southeastern Ukraine have blocked access to Western financing.
In another worrying sign, Russians have been bulking up on consumer items as the ruble depreciates, converting savings into durable goods lest their savings become worthless. Appliance stores in Moscow have had runs on refrigerators, washing machines and televisions. It is a pattern seen before previous ruble crashes, indicating evaporating faith in the currency. Despite Moscow’s plans to turn East as an alternative, China’s banks just do not have the capacity. Instead, the debt threatens to drain the Kremlin of its $400 billion in foreign currency reserves.
“I expect inflation to go to double digits early next year,” said Vladimir Tikhomirov, chief economist at BCS Financial Group. Among the companies with their hands out are Rosneft, Novatek, VTB Bank, Rusnano and Russian Railways, asking for sums well beyond the $90 billion held by the National Welfare Fund, a sovereign wealth fund for rainy days.
“The only reason people haven’t started changing their savings into currency in larger amounts is because it happened so fast,” he added. “It caught them off guard.” Mr. Putin has yet to express publicly how he expects Russia to emerge from its financial problems. At a news conference last month, he addressed concerns about oil by saying that prices had been high enough in the first part of 2014 to finance much of the Russian budget, and that the country would just have to “wait and see” about next year.
Russia’s state finances appear solid for now. The depreciation of the ruble has raised tax income from commodity exports priced in dollars, like oil. He also tried to portray the large drop in value of the ruble as useful. “We used to sell by the dollar and get 32 or 35 rubles in return, but if you look at today’s exchange rate, we get 45, 47 or 48 rubles for every dollar’s worth of what we sell,” he said, and the ruble has reached 54 to the dollar since Mr. Putin spoke. “In that sense, budget revenue has even increased.”
And the central bank and two sovereign wealth funds hold billions, giving the country a decent cushion. Still, economists argue that the headline numbers exaggerate somewhat the amount available to prop up the ruble or bail out companies, as the money is already committed to long-term investments in Russia. Vedomosti, the main business daily, published an excoriating editorial on Tuesday comparing Mr. Putin to President Robert Mugabe of Zimbabwe, who the editorial said did basically nothing as the exchange rate there fell to four trillion Zimbabwe dollars for one American dollar.
The deteriorating economy also puts Mr. Putin in a difficult spot. While noting that Russia was in far better shape, the editorial said that “the biggest problem of Russian leadership is inability to admit mistakes.”
He has presided over more than a decade marked largely by an expanding economy and rising inflation-adjusted wages. Now that record is coming to a close. “The economy is seriously ill, and the ruble rate is one of the indicators crying about the illness,” the editorial said. “Russia’s leadership refuses to admit there is an illness and pushes it into the depths.”
Mr. Putin did not address the projected economic decline publicly on Tuesday, and ministers disagreed on the severity of the problems. Anton Siluanov, the Russian finance minister, called the report predicting a recession a “preliminary assessment” and said it had not been approved by the entire cabinet. Mr. Siluanov also argued that the ruble was now undervalued after its long slide.
Aleksey Vedev, the deputy minister of economic development, told reporters that “the Russian economy is harmed by three forms of crisis or elements of instability: structural, speculative and geopolitical risks,” according to Tass, the state-run news agency. “So in my view it is a little simplistic to assert that the Russian economy lowers its rate of growth or goes into the negative only due to oil prices.” Mr. Putin is due to deliver his annual State of the Nation speech on Thursday, and there has been much speculation that he will announce more liberal or more centralized economic policies. Some economists think that the policy is essentially to wait out the sanctions, with the Kremlin anticipating that they will expire in a year and that then all the financial problems will diminish.
Anton Siluanov, the Russian finance minister, called the report a “preliminary assessment,” and said it had not been approved by the entire cabinet. The Ministry of Finance and Ministry of Economic Development often release competing and contradictory economic data. The crisis is still likely to force significant cuts in public spending. The Ministry of Economic Development, which publishes the government’s economic outlook, on Tuesday revised its 2015 forecast to show a contraction of 0.8 percent, compared with a previous projection of 1.2 percent growth. Private assessments said there could be a drop of 2 percent.
Mr. Siluanov also argued that the ruble was now undervalued after its long slide. He said the ruble might stabilize next year at 45 to the dollar, stronger than the economy ministry’s estimate on Tuesday of an average ruble-dollar exchange rate of 49 in 2015. The setbacks have slowed or eliminated goals to achieve higher wages, better health care and cheaper housing, ambitions laid out in a series of populist decrees Mr. Putin signed on his first day in office for a third term, in 2012.
The 11 decrees described a “transformation strategy for society” for his new six-year term, including creating 25 million “highly productive” jobs, raising life expectancy to 74 years and raising the birthrate.
“Russia is in an economic crisis,” said Kirill Rogov, an independent economic analyst. “Of course, all those grand plans are irrelevant now.”
It is impossible to predict whether the economic woes might inspire antigovernment demonstrations. There have been minor protests in Moscow by medical professionals denouncing the closure of about 28 clinics in the capital and the dismissal of 10,000 medical staff members.
But the effects of the economic crisis are just starting. Once constituents like pensioners realize the ruble is losing its purchasing power, they can be expected to demand raises so they can buy as much as before. But state companies will be first in line.
“The problem is that he cannot deliver on his economic promises, so he has to deliver on post-imperial nostalgia,” Mr. Guriev said of Mr. Putin. “He will say that we are not rich anymore, but we are at least feared.”
The annexation of Crimea lifted Mr. Putin’s ratings into the stratosphere, raising concerns that he might try similar moves elsewhere, like Moldova, to distract people if the economic crisis deepens.
The crisis and three rounds of Western sanctions seem to have produced a distinct shift in the propaganda on state television and elsewhere, from triumphalism to a determination that Russians are ready to make any kind of sacrifice to win a showdown with the United States.
A billboard on the main Sadova ring road around Moscow recently proclaimed, “There are more important things in life than the financial market,” and made references to Russian history.
“They are moving from greatness to suffering hardship, because we are fighting American domination,” Mr. Milov said. “It is a totally different definition of the mission.”