Is Putin Getting Ready? Yes, Russia’s Finances mean it’s Prepared for WAR

By Anna Andrianova and Yevgenia Pismennaya


By Anna Andrianova and Yevgenia Pismennaya – Russian President Vladimir Putin is preparing for war. War, the main weapons in which will not be hypersonic missiles and nuclear torpedoes, which he boasted about for a whole year.

Putin has built a financial fortress, which, according to government officials and Kremlin advisers, will protect the economy from strikes and encourage the US and allies to assess Russia’s military capabilities and intentions..

Putin has been striving for this goal since he came to power at the turn of the millennium. The problem is becoming more urgent against the background of the next crisis with the West. When the global financial crisis occurred 10 years ago, Russia’s main stock market index lost three-quarters of its value. And 5 years ago, after the collapse of oil prices and the imposition of sanctions because of the situation in Ukraine, the ruble fell by half against the dollar, which led to the longest recession during Putin’s rule.

Now Russia is on the rise again, despite the adoption of a very curtailed budget. The total expenses of the Russian treasury this year (about $ 270 billion) make up less than half of Pentagon expenses. Last year, the country became one of the three G20 surplus economies, and its debt burden is the lowest in this group.

The rise could be related to the decision that Putin made at a closed meeting with his economic advisers in the fall of 2016. Russia decided to absorb all oil revenues above a certain price level, redirecting the excess income to the National Welfare Fund. To be more precise, this is oil revenues at a price higher than $ 40 per barrel.

Analysts noted that such a decision entailed political risks. On the eve of the elections, Putin worked with a shrinking economy, while simultaneously controlling military intervention in Syria.

Instead of increasing costs, reassuring rival domestic groups that support his control system, Putin reduced spending across the board, including defense. At the same time, the Central Bank of the Russian Federation maintained its reserves, refusing costly protection of the ruble. The regulator focused on buying gold and yuan, along the way “merging” the treasury of the United States.

“Putin is increasing savings, as they give him power. He needs money to fight the West, with increased sanctions and future economic crises, ” said Andrei Kolesnikov, a political scientist at the Carnegie Moscow Center.

Financial institutions such as the IMF discreetly endorse these actions amid repeated threats of punitive measures from Washington and Brussels. Moody’s and S & P agencies this month restored Russia’s credit rating at an investment level.

Putin’s striving for austerity takes a significant supply of political capital that he amassed during his long stay in the Kremlin: weak GDP growth, falling real incomes; interest rates remain relatively high; inflation is rising; steady growth in government pensions is declining.

In addition to public distrust, which caused Putin’s approval rating to fall to a minimum in a decade, amendments to pension legislation have been issued. In a country where most people were born under communism, cost-cutting measures are being taken, resulting in violent outbursts of protests. The increase in the value added tax further undermined purchasing power, accelerated the growth of consumer debt and increased public discontent.

- Advertisement -

“The leadership of our country has chosen a very conservative scenario: to accumulate as much as possible and spend as little as possible. Now the goal is to preserve the achieved results, macroeconomic and fiscal stability even by stimulating growth, ” said Yaroslav Kuzminov, the rector of the Higher School of Economics in Moscow.

Putin’s favorite figures — the central bank’s reserves — have increased over the past four years by $ 125 billion to $ 475 billion. These reserves, the fifth largest in the world, have not yet reached the peak of 2008 ($ 598 billion) when oil was trading at $ 150 a barrel.

The Russian mechanism for absorbing excess oil revenues and the National Wealth Fund are modeled on the Norwegian hedging system against oil price fluctuations and the provision of future pensions. But unlike Norway, which rarely uses its trillion-dollar reserves, officials in Moscow are depleting Russian reserves at every next difficulty, says Karen Vartapetov, an analyst at S & P.

“All previous cancellations of the budget rule were due to some force majeure circumstances. Russia is now accumulating funds faster than the current oil environment, due to the likelihood of other shocks, including new sanctions, ” Vartapetov said.

To continue the expansion, Putin relies more on business for investment and, to a lesser extent, on multi-year budget infrastructure projects, such as those he ordered for the 2014 Winter Olympics and the 2018 World Cup. He made it clear to voters that he believes that Russia is under siege, both because of Western financial centers, and because of NATO forces. He also added that he would not make the same mistake as the USSR and would not be drawn into a catastrophic increase in expenses.

The USSR collapsed in 1991 because the Kremlin decided to splurge on vital industries such as the defense industry to compete with the United States, while the country’s revenues directly depended on oil prices. Mikhail Gorbachev, the last Soviet leader, has accumulated debts worth tens of billions of dollars in financing purchases of food and consumer goods from the West. Putin methodically reduced these debts, eventually paying almost everything ahead of time.

Now, largely due to a 23% increase in tax collections last year, the Russian balance sheet looks best, Putin said.

“For the first time in our history, our reserves cover the entire external debt, both public and commercial. Now we have a powerful financial security cushion,” the Russian president said in his annual address to the Federal Assembly on Wednesday February 20th.


Published on: Mar 2, 2019 @ 18:54

from – translated by and for FRN

Subscribe to our newsletter
Sign up here to get the latest news, updates and special offers delivered directly to your inbox.