‘Don’t panic’ plea to Russians as Kremlin warns of budget cuts

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Russian government officials have appealed for calm after predicting budget cuts and a further surge in inflation as the country faces its worst economic downturn in 15 years.

With the currency and economy wilting under the twin blows of Western sanctions and a fall in the price of oil exports, finance minister Anton Siluanov proposed slashing some 10 per cent from most areas of the state budget.

That is a significant turnaround for the government of president Vladimir Putin, who only weeks ago told the nation in a televised address that state spending would not be cut.

Many parts of the economy, which relies heavily on public spending, will be affected, though Russia’s vast military modernisation programme and spending on infrastructure reforms will remain untouched as the country tries to reassert its power in the face of the West.

That means Russians, who have seen the cost of imports jump as a result of the fall in the rouble, can expect more increases in the cost of living.

Inflation could hit an annual rate of 17 per cent in the spring, deputy economic development minister Alexei Vedev was quoted as saying. Last year, inflation was 11.4 per cent, the highest rate since 2008.

The rouble, which lost about half of its value last year, was down another one per cent in afternoon trading in Moscow yesterday, to just above 66 roubles per US dollar.

Russia’s central bank has acted to stabilise the rouble and limit inflation. It raised interest rates sharply last year and intervened directly in currency markets. Higher rates, however, will hurt the domestic economy as they make borrowing more expensive.

While government spending will still rise overall this year, it will do so only by five per cent, as opposed to the previous plan for 12 per cent, Mr Siluanov said.

He said that if oil prices average $50 a barrel this year, government revenues will be around $45bn lower than in an earlier budget plan. The price of international crude oil was below $47 a barrel on Wednesday, near a six-year low.

Meanwhile, the World Bank sharply downgraded its predictions for Russia’s economy, foreseeing a 2.9 per cent contraction in 2015.

As its prospects darken, Russia is highly likely to see its bond rating downgraded to “junk” status by Standard & Poor’s in coming days, said economic development minister Alexei Ulyukaev, who urged citizens not to panic.

“In a crisis situation, the main thing is to preserve mental calm ... and most of all to think about your own health and the health of your family,” he said.

Natalya Orlova, an analyst with Alfa Bank, said the government will be keen to direct cuts away from high-employment sectors if possible, and instead target new projects and services.

With some areas of the Russian economy protected from budget cuts, others face pain.

The government is well aware of the risks of cuts to the healthcare system, a potentially explosive prospect after lay-offs at Moscow hospitals sparked protests in November.

Education is also in need of “structural reforms”, Mr Siluanov said, suggesting it could take a hit as well. Like the healthcare system, education retains a reputation for Soviet-style working practices and often decrepit facilities.