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Putin’s campaign promises pose economic challenges
Economists: He may not be able to deliver better wages, benefits
Question of the Day
Mr. Guriev, a prominent economist, believes the government could run out of cash to cover these expenses unless Russia’s economy delivers at least 6 percent growth, which he said is possible only if Mr. Putin pursues economic reforms and gets serious about eradicating corruption.
The economy, highly dependent on exports of oil and gas, is expected to grow less than 4 percent in 2012, down from 4.3 percent in 2011.
“With the current structure of the economy, 6 percent is feasible only if oil prices grow 20 percent every year,” Mr. Guriev said.
Obstacles to growth
But back then, the government was able to balance its books with an oil price of only $60 per barrel. With the growing spending, Russia these days can avoid a deficit only if oil stays above $117. Urals crude is now trading at about $120.
Economists say the government may be able to afford the extra spending at this point, but it could hamper growth and leave Russia vulnerable in case of greater global economic turmoil or a drop in oil prices.
Russia has $61 billion in a reserve fund, created from oil revenue that the government tucked away when prices were high. But even more money was sent out of the country last year, a whopping $84 billion in capital outflow, indicating a lack of confidence in the Russian economy and illustrating the difficulty the government faces in attracting needed investment.
Potential sources to cover the new expenses could include higher taxes on metals and mining industries and the privatization of some state-owned assets, as well as cutting costs and inefficiencies, according to Mr. Weafer.
Along with the campaign promises of higher wages for teachers and doctors, Mr. Putin’s government has committed to spending $61 billion this year alone to revamp Russia’s armed forces. And military spending is set to grow by some 20 percent annually in at least the next two years.
Economists and even some Russian officials have insisted that the current pension system is unsustainable and will drain twice as much money from the budget in the coming decades unless the retirement age is raised. Mr. Putin, however, vowed throughout his campaign that the retirement age would remain unchanged.
Yulia Tsyplyaeva, chief economist at BNP Paribas in Moscow, said that while Mr. Putin’s promises of higher salaries are feasible, the pension system poses a much more serious challenge.
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