An oil price at record high exceeding $140 a barrel, gold and foreign exchange reserves of a record $598.1 billion, a Reserve Fund standing at 3.6 trillion rubles (then worth about $125bn) and National Fund for Well-Being with another $32 billion all made the duopoly of President Dmitry Medvedev and Prime Minister Vladimir Putin feel secure. The two sovereign funds were formed by conservative finance minster Alexei Kudrin in a bid to ring-fence windfall oil taxes from inflation-inducing current account spending. Today Russia is reeling from the buffeting it has taken as the maelstrom of the world economic crisis has swept over it since the late Autumn. Government and business, whose only previous crisis experience was the 1998 financial default and devaluation have been confounded. Those of the multi billionaire oligarchs who crafted their fortunes from the discredited ‘loans for shares’ scheme in the mid-nineties to fund Boris Yeltsin’s presidential re-election campaign, and have not fled the country or ended up in jail, are now in financial trouble and running to the government for bailouts. They are joined by the secondgeneration oligarchs who, seduced by cheap money from international bankers, over-leveraged their assets to expand their companies and make acquisitions.

From Vladimir Potanin to Shalva Chigirinsky, from Alexander Mamut to Alexei Polonsky oligarchs are shedding their yachts, Cote d’Azur homes and liquidating assets as they scramble for the survival of their empires. The savviest oligarch of them all turns out to be Mikhail Prokhorov, erstwhile partner of Vladimir Potanin, who although seeing his fortune, as rated by Finans magazine, reduced from $19 bn to $14bn is now top of Russia’s rich list. The 43-year old bachelor is said to not have had time to borrow against the assets he won in a split from Potanin last year and therefore is relatively unleveraged. In September last year his ONEXIM Group bought a 50% stake in Renaissance Capital for $500 million.

Whether the oligarchs won their fortunes by fair means or foul they get little sympathy from the average Russian. Babushkas are delighted to see the tables turned on those who gained state assets at undervalued prices in 1996. The state assets were pledged for loans to finance the populist government measures aimed at winning re-election of Boris Yeltsin in 1996 in the face of a strong Communist showing in the first round of elections. “Now we see the shares being pledged against short term loans from the state at current market value, with the condition of a government nominee being appointed to the board of directors,” one veteran Russia-watcher told BSR. “the loans for shares have been turned into shares for loans.”

The Russian government has pledged at least $200 bn support the economy in 2009 on top of the billions it spent in the last few months of 2008. Central to this is a commitment to ensure the continuation of public services across the country, the commitment to pensions and to increasing help for the unemployed.

Brokers, who just last September, were debating if they would get their full year-end bonuses consider themselves lucky if they still have a job. The disconsolate group of eight expatriate bankers and stockbrokers who gathered at the bar in the popular Scandinavia Restaurant in Moscow late February was commiserating with each other. All had been terminated and all were flying homeward. At the other end of the social scale thousands of construction laborers from central Asian states have had to find their way home as the tower cranes stop turning and the headline high-rise projects they worked on have been frozen.

In the second half of February the volatility which continues to engulf Russia became clear from statistics, enumerated by Uralsib’s Chief Strategist, Chris Weafer, who in his weekly Financial Analysis wrote: “Economy shrank 2.4% in January. The end January macro picture made for grim reading. The pace of decline accelerated again through January. The average monthly wage in Russia is now 15,200 rubles ($420), down from 17,739 rubles in September. At that time the translated value was $696 with the stronger ruble. The value of retail sales was 1,072 bn rubles ($29.7 bn), up only 2.4% year on year while, previously, the rate of growth was over 14%. The total number of people unemployed at the end of the month was 6.1 mn, i.e. an unemployment rate of 8.1%. Industrial production last month was down 16% year on year and, according to the Economy Minister, GDP contracted 2.4% from a revised 1.8% drop in December.”

However Eric Kraus, Special Advisor for Global Strategy to Otkritie Investment Corporation, a Russian brokerage and bank, who has covered Russian financial markets since 1995 sees a number of signs of stabilization in Russia – “a phenomenon painfully missing virtually anywhere else – both the speed and the severity of the global meltdown is simply breathtaking. Russia is climbing back up the rock-face, but it is climbing up through an avalanche…,” he wrote in his monthly strategy newsletter Truth & Beauty (and Russian Finance) in early March. “It is thus a risky business issuing bullish calls for any economy – we see growing evidence for a gradual stabilization in Russia – most recently, at 40.6 the VTB Purchasing Manager Index (PMI) while still clearly recessionary, has improved for the second month running – from 33 in December to 35 in January; inventories of finished goods have declined quite substantially, one of the conditions for a resumption in manufacturing activity,” he continued. As of this writing, the ruble has stabilized, and after the spectacular recovery in the Eurobond market, the ruble bond market is now steadily improving, with bids for first and second tier assets at yields around 20%.

Kraus believes that oil prices have “probably bottomed”. He sees “Chinese resource demand coming back; the RTS equity market bottomed around 500 last October and does not want to go any lower (current quote: 540) but we would expect it to trade within a reasonably narrow range for the immediate future. The best near term investment opportunities now include Russian Eurobonds, and for the adventurous, selected ruble bonds.”

But, Kraus cautions, “ the downside risks are obvious: if we are faced with a true meltdown of the global economic, financial and trading systems, then any predictions regarding Russia in isolation should not be relied upon. If the disaster scenario were to eventuate, we suspect that our readership would have other, more immediate preoccupations – the procurement of food, water, and a dry cave in which to sleep – rather than blaming us for a missed call or two.” Zeljko Bogetic, the World Bank’s chief economist for Russia has said the Bank’s main scenario calls for an average price of oil for the year amounting to $74-$75 per barrel. However should the price drop to $40 then Russia was going to need international financial assistance in 2010, he said.

Russian presidential economic adviser Arkady Dvorkovich appears to agree with Kraus’s cautious optimism. In an interview with Reuters at the end of February he declared that “Russia has sufficient oil fund reserves to live through this year without borrowing,” even as the government braces for its first budget deficit in a decade. The government is in “no hurry” to sell bonds, though it plans to monitor markets closely, Dvorkovich said in the interview. “If market conditions will improve, then the government will start borrowing.”

The Economic Development Ministry predicts a 2.2 percent contraction this year and a budget deficit of 8 percent of gross domestic product.

The Finance Ministry was expected to unveil the final budget revisions in mid-March.

Finance Minister Alexei Kudrin has said that state spending would increase to 9.5 trillion rubles ($267 billion) this year. Budget revenue may decline 31.5 percent from the previous year’s level of 9.3 trillion rubles.

“The bailout isn’t that important now, and we should spend less time on it,” Dvorkovich said.

The country has disbursed about 800 billion rubles to support the banking system, about 100 billion of which was used to bail out troubled lenders, Dvorkovich said. Most of the support took the form of loans, at“relatively high interest rates,” he said.

Government officials and their families will be required to provide more detailed information about assets and income when they file their taxes this year as part of a push to combat corruption, Dvorkovich said. “The new tax forms will be more specific and expanded. We’re not out for anyone’s blood, but it’s important that people work well,” he said.

President Dmitry Medvedev has made the fight against what he called “legal nihilism” a priority of his presidency and has called corruption a threat to national security.

Dvorkovich said Russia’s bureaucracy is the main obstacle to the government’s plan to stabilize the economy and support banks and other companies. When asked what needs to be done to improve officials’ performance, he said, “Replace them, as the president has said.”

Prime Minister Vladimir Putin has pledged his government will make good on all of its social obligations despite the global financial crisis. “We are determined to meet all our priority goals, including stabilizing the pension system and raising pensions”, he told a full cabinet meeting. “We have drawn up a set of measures to support the non-financial sectors, but we still have to develop a clear idea of how the global crisis will affect social projects, and design support measures,” he said indicating that Russia as much as anyone else has no idea if the crisis engulfing the world economy is bottoming out.

Even if it is, then the country is still in for a long haul with the world economy contracting, reduced access to credit and reduced demand.

The Economic Development Ministry has put together a list of 29 enterprises in Russia’s transport sector as well as nine communications businesses it believes are priority companies deserving government anti-crisis assistance. The government has to approve any support. Prime Minister Putin has proposed zeroing tariffs on railway shipments of Russian cars manufactured in the European part of Russia. Speaking at a meeting in Tatarstan to address problems in the automobile industry, he said that the shortfall in revenues to Russian Railways should be reimbursed from the state budget.

The focus is now on the G20 Economic Summit in London in April. Putin has warned that the economic crisis has yet to hit bottom. Russia, he told the leaders of the United Russia party, would have a tough year, but would make it through. “We’re closely watching the processes running in the world economy – whether good or bad – we depend on it and have to state that the crisis is far from being over and has not even reached its peak yet,” said the prime minister.

According to Putin, the measures taken by developed countries “are not bringing visible results yet”, according to Russia Today TV. “It means such a situation may remain for a rather long time,” he noted. The Prime Minister also spoke of the importance for the countries joining their efforts to fight the financial crisis. “The scale of disproportions that accumulated in the world economy is too large, and in order to clear the path to a new upturn much has to be accomplished together with our partners in the international community, and on our own,” Putin said.

Despite further strains on the budget and the worsening economic slump, the government is determined to continue investing in social policy projects, Putin said during a meeting with social policymakers in Moscow.

“Lowering social standards or social dumping must not become an anti-crisis tool, because that does not only fail to improve the situation but makes it harder to return to stable economic development,” Putin said.

Health and Social Development Minister Tatyana Golikova, speaking alongside Putin, acknowledged that the crisis threatened the public’s faith in the economy. “Among many groups in society, there now is mistrust in the existing financial and economic mechanisms,”she said.

But Golikova was adamant that it was the government’s duty to fulfill its social obligations. “The government has made a principal decision that even under the current financial crisis it will keep up all its  social responsibilities on the proper level,” she said.

The Russian government is winning plaudits for its handling of the crisis. The World Bank’s latest report on Russia noted that after a decade of high growth, the Russian economy is experiencing a slowdown in the wake of the global financial crisis. The Report noted that while Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of oil make the impact of the crisis more pronounced than otherwise.

“It’s important to realize that Russia is still a commodity-based economy,” said Klaus Rohland, the World Bank Country Director for Russia. “The medium-term challenge and strategy of Russia would be to move to a more diversified, competitive economy.” Prudent fiscal management and substantial financial reserves have so far protected Russia from deeper consequences of this external shock. Bogetic, the Bank’s economist, noted that “the government’s swift, comprehensive, and coordinated policy response so far has helped limit the impact of the crisis. However, a prolonged slowdown could necessitate a further fiscal stimulus package in 2009.”

Last October British Business Secretary Peter Mandelson said that Russia is well-equipped to withstand the financial crisis. Thanks to its oil- and gas-financed surplus, “Russia is better placed than others to weather the storm,” Mandelson told reporters during a four-day visit to Moscow.

Mandelson said there were no signs of a drop in confidence among his country’s business community. “There is no sign that U.K. investors are pulling back from Russia or down-scaling their plans,” he said.

While worldwide, economists are predicting no recovery until the third quarter of 2010 in the developed economies, all Russian investment banks are said to agree that while the first half of 2009 is going to be terrible, Russia should start to recovery in the second half of this year.

Ben Aris, the publisher and chief editor of Business New Europe, wrote at the end of 2008, that “Despite the global slowdown, Russia is expected to be one of the few islands of growth left in the global economy by the end of 2009.”

Aris quoted Renaissance as saying in the preamble to its 2009 strategy paper: “In 2009, Russia’s markets will outperform when the historic levels of disorder in global finance begins to ease. The breakdown in global markets is fundamentally a consequence of structural weaknesses in developed economies. When the liquidity being created globally to combat the crisis begins to feed into risk assets, emerging markets in general, and Russia in particular, will benefit disproportionately.”

Uralsib makes a similar point, arguing that Russia's lack of integration into the global market gives it a measure of protection from the global slowdown, while the momentum of the internal growth built up in the last years will be pushing the economy towards recovery. But this recovery is not certain.

Aris quotes UBS as summing up what most of the investment banks are saying in its strategy: “In our view, Russia is a special case in the emerging
markets block. Markets have sold off heavily and the [central bank] has lost $115bn of reserves (net of valuation changes) since August, but from a macro point of view it is actually quite difficult to find much wrong with Russia. Yes, the economy will slow down, given less available foreign money and, yes, the economy was overheating and inflation had increased, and, finally, Russia is indeed a commoditybased economy that is experiencing a negative terms of trade shock. Still, none of this, in our view, can explain the reserve loss or the way markets have sold off.”

Oleg Deripaska said in an interview late last year that government infrastructure projects could not only create new jobs but also encourage consumer demand.

“We are a lucky country in a way,” he said. “As opposed to the West, where most basic consumer demands are already met, Russians tend to spend rather than to save once they get money in their hands.” “For instance, in more than 12 million families, more than one generation lives under the same roof. There is a huge objective demand for housing, and people will buy apartments if they are offered them at reasonable prices,” he said.

Mikhail Prokhorov emerged as Russia’s richest man RUSIABLOG.ORG