Shuvalov Offers Peek at Budget Cuts

In the first glimpse of how the government will slash spending, First Deputy Prime Minister Igor Shuvalov said Wednesday that funds would be cut for infrastructure programs to provide greater support for the banking sector.

Shuvalov also indicated that the state would take a more cautious approach toward distributing the $50 billion it has allocated for companies to refinance foreign debt.

The Cabinet will announce specific budget cuts and the new banking measures on Thursday, Shuvalov told investors behind closed doors at a Troika Dialog conference, participants said afterward.

The mood at the annual conference was grim as Sberbank president German Gref predicted that the crisis would last three years and Fitch cut Russia’s sovereign rating for the first time in a decade.

Nouriel Roubini, the New York University professor known as “Dr. Doom” for offering bleaker forecasts than other economists, warned that the Russian economy would contract by 3 percent to 4 percent in 2009. The Economic Development Ministry expects that the economy will contract by 0.2 percent.

Shuvalov said in the closed-door meeting that the second and third quarters would probably be the most difficult periods for the country, according to participants.

Shuvalov said the government would be more careful about which enterprises received bailouts, Troika Dialog chairman Ruben Vardanyan said. One-fifth of the $50 billion earmarked for refinancing foreign debts has been handed out to companies, including $2 billion to Mikhail Fridman’s Alfa Bank to maintain the bank’s 44 percent stake in VimpelCom and $4.5 billion to Oleg Deripaska’s RusAl to acquire a stake in Norilsk Nickel.

“An illusion existed that if the state gave out money, the economy would recover quickly,” Vardanyan said. “Then it became clear that the crisis was both serious and had come to stay. And resources are not unlimited.”

Shuvalov dismissed the possibility that Russia, like Britain and the United States, would create a “bad bank” for all its negative assets, an idea circulated by the Association of Russian Banks last month.

“Channeling all ‘bad assets’ to a single agency would entail high risks of corruption in Russia. This won’t happen,” Shuvalov said in comments published on the conference’s web site.

He said the state would place a priority on Gazprom, Russian Railways, power companies and the defense industry, despite Prime Minister Vladimir Putin’s call at Davos last week for governments to cut back on military spending. Shuvalov also said the crisis presented an opportunity for reforms to improve energy conservation, the investment climate and corporate governance.

Given the huge drop in oil prices since last summer, it would be irresponsible for the state not to adjust spending, he said. Last month, Putin ordered this year’s federal budget to be set at an oil price of $41 per barrel, down from the previous price of $95.

Shuvalov said cuts would come from planned infrastructure projects, participants said.

Also facing cuts are federal subsidies to the regions, Reuters reported, citing a participant at the meeting. Many regions receive subsidies from the government, and cutting their funds would put them in the position of having to decide which local programs to cut — potentially moving a political hot potato off the federal government’s plate.

Deputy Transportation Minister Alexander Misharin said at the conference that infrastructure budget cuts would give way to a rise in “public-private partnerships.”

Misharin also said the crisis could spur the development of a “concession model” in which private companies receive money from the federal budget, private investment and tolls to manage highway infrastructure and rent roadside land.

Federal spending cuts may also increase unemployment because the state’s job-stimulus plan envisions tens of thousands of new jobs in infrastructure. The Health and Social Development Ministry said last week that the state would begin implementing the 43 billion ruble ($1.2 billion) job-stimulus plan in five of Russia’s regions.

Unemployment is of growing concern for the government with several national protests in recent weeks by people worried about their livelihoods amid the crisis. Against the backdrop of nationwide layoffs, the Interior Ministry announced this week that it would suspend intended staff cuts, citing the potential for the economic crisis to spur a sharp increase in crime.

President Dmitry Medvedev told regional authorities at a conference on Jan. 21 that “job security is one of our top priorities, one of the government’s principal social obligations.”

The national unemployment rate is currently 7 percent.

The Moscow Times

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