Russia Facing Inflation, Zero Growth

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30 January 2009

Russia is facing high inflation, slow growth, and a 40 percent drop in
budget revenues as the global economic crisis lays bare the country's
poorly diversified economy. Senior Russian finance officials presented
the gloomy outlook at a hearing in the lower house of Parliament
Friday.  Global economic crisis exposes Russia's financial weak spots


Members of Parliament listened as the finance minister
and other top officials outlined how an unexpected and precipitous drop
in oil prices has pummeled the Russian economy. Economic Development
Minister Elvira Nabiullina told lawmakers that the global economic
crisis has exposed a number of Russia's financial weak spots, including
declining investment.

Nabiullina says investments were a motor
of Russian economic growth, noting that 25 percent of them were
financed by foreign capital. She adds that one-sixth of the
investments were made by the Russian state, which relied on oil profits
to fill the federal budget.

The minister says Russia has not had
enough domestic sources of growth that could have softened the impact
of the global economic crisis.

Nabiullina says the government
increased budget expenditures for necessary items, but did not have
time to eliminate infrastructure problems, or to modernize and
diversify the economy by putting it on a path toward innovation. She
hastens to add, however, that these things are being done and must be
done.

Export revenues expected to decline

Finance Minister Alexei Kudrin says export revenues are
expected to decline from $469 billion last year to $269 billion in
2009, amid falling foreign demand not only for oil, but also Russian
metals and fertilizers. This, he says, will reduce the growth of
Russia's gross domestic product to zero, compared with six percent in
China, two percent in the United States and one percent in the Euro
zone. Kudrin predicts U.S. and European inflation will be virtually
zero, but warns of 13 percent price hikes in Russia.

Kudrin
says that lower prices tied to lower demand are natural during a
crisis, but that an opposite trend will emerge in Russia due to
increased prices for imports linked to the devaluation of the ruble. 
He notes that Russia relies heavily on imports not only of consumer
goods, but also technology, spare parts, and equipment purchased by
Russian firms.

The Russian ruble has lost about 20 percent of its value since November.

The
Finance Minister says the federal budget is expected to decline by 40
percent, from a projected $300 billion [10.9 trillion rubles] to about
$185 billion [6.5 billion rubles]. Russia's 2009 budget assumed oil
selling at $95 per barrel, more than twice its current price. Prime
Minister Vladimir Putin has ordered the budget be revised based on a
price of $41 per barrel.  

Russia has spent about $200
billion, more than a third of its currency reserves since August, to
prop up its economy, to shore up the budget and defend the ruble. 
Alexei Kudrin says he expects the economic crisis to end before the
currency reserves run out.