BOFIT Weekly Review 2016/05
Tight budgets and uncertainty currently dominate Russian economic policy
Persistent low oil prices and the weak economy have forced Russian policymakers to balance between budget cuts and stimulus measures. Public sector cuts will require painful, unpopular measures, so implementation has been resisted as long as possible. Recent statements from Russian leaders on the country’s economic situation and outlook exude a puzzling optimism, given that GDP last year contracted nearly 4 % and the oil price in January was down about 40 % from a year earlier.
Spending cuts are currently under preparation led by the finance ministry, but a large part of budget spending is ruled out from cuts. On the other hand, the economy ministry is drafting an economic support programme for this year. The programme seems to be largely cosmetic, however, as few additional funds are expected to be allocated to finance it.
The notion of raising money for the budget through privatisation of state-owned enterprises is back on the agenda. Privatisation plans have been under preparation for years, but the actual privatisation sales of large firms have been postponed due to market weakness. The situation is unlikely to improve this year. The terms that president Putin has imposed on privatisation sales further limit the pool of potential buyers. Even in the best case, the impact of privatisation sales on the budget would be limited and temporary.
The reluctance to tackle difficult reforms can also be seen in the government’s long-term plans. Russia’s structural economic problems have been long recognised and e.g. the list of economic goals of the recent national security strategy again includes improving the investment climate and business environment, as well as increasing productivity. In practice, these goals have remained secondary, with the emphasis instead on import substitution and other measures restricting business operations.